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The Factor Box

Explore the FAQ or Glossary to better understand how to use the Factor Box and the terminology displayed within the tool.

Review the Methodology to understand the rationale, data, and calculations powering the Factor Box.

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Overview and Methodology

  • What is the Factor Box?

    The Factor Box is a new lens through which to evaluate investments. Investors can use the Factor Box to understand and compare the factor exposures of various funds, and to aid in portfolio construction and risk management. The Factor Box analyzes and depicts fund exposures across six different factors.

  • How is the Factor Box different from the Morningstar Style Box?

    In 1992, Morningstar introduced the Style Box, which provided a simple way for investors to construct portfolios by viewing securities, funds, and portfolios across two dimensions or exposures – market cap/size (large versus small) and fundamentals/style (value vs growth). Size and Value are among the earliest understood rewarded drivers of risk and return to be adopted broadly. More recently, academic research, empirical data, and investor experiences indicate additional persistent drivers of risk and return (momentum, quality, volatility) and important dimensions of portfolio construction (yield). The Factor Box provides the opportunity to evaluate funds across all of these important factors as opposed to focusing solely on value and size.

     

  • How can the Factor Box be used?

    The Factor Box can be used in a variety of ways to manage risk and diversification. We find the most common applications are to help you: 

    • Understand and evaluate the factor exposures of a fund relative to the exposures of its peer funds
    • Select an optimal fund for a particular objective
    • Track existing funds within client portfolios
    • Identify gaps in exposures across a portfolio
    • Identify ways to achieve similar factor exposures with lower cost alternatives
  • What funds are available within the tool?

    The Factor Box covers approximately 2,400 U.S. domiciled equity mutual funds and ETFs. To be included in the universe, the fund must be registered under the Investment Company Act of 1940, as amended, have a U.S. geographic focus, and have a Morningstar Category assigned or have more than 80% coverage in the BlackRock US equity risk model (BFRE USAM)1. To determine if a fund is included within the tool, simply type the ticker, fund name or a keyword into the Search Box. If included, the fund will be listed in the search results.

  • What factors are included in the box?

    Factors are fundamental historical drivers of investment returns. While there are hundreds of factors, only a few are known to be broad (exist across asset classes), persistent (work across market cycles), historically rewarded, and well documented by academic research. For this reason, the Factor Box includes six different factors – value, low size, momentum, quality, dividend yield and low volatility. These six factors are proven, persistent drivers of risk and return over time and reflect the factors that managers often consider when constructing portfolios. All six factors are intuitive and can help explain the commonalities of return across and within asset classes. These factors have been observed for decades and because of their economic foundation, we believe that they may persist for decades to come. 

  • How are the factors defined (broadly)?

    FactorDefinition
    Value Stocks which are inexpensive relative to fundamentals
    Low Size Companies with smaller market capitalization
    Momentum Securities displaying positive price trends
    Quality Companies with strong balance sheet and more stable earnings
    Dividend Yield Stocks with a high dividend relative to price
    Low Volatility Securities with low historical price volatility

     

  • Why isn’t growth included as one of the factors?

    Growth has historically not been a rewarded factor. The Factor Box focused only on those investment factors that are broad and persistent drivers or risk and return.

  • What risk model is used and how are the factors defined within the model?

    BlackRock’s multifactor equity risk model, BFRE USAM, powers the exposure data for the Factor Box. BFRE USAM risk model exposures are combined or reversed to accurately reflect the desired style factors within the Factor Box. These BFRE USAM risk factors are mapped to the respective Factor Box factor as listed below:

     

    The Factor Box FactorBRFE Components
    Value Value + Earnings Yield
    Low Size Inverse Size + Small Cap
    Momentum Momentum – Reversal
    Quality Profit – Leverage
    Dividend Yield Dividend yield
    Low Volatility Inverse Volatility
  • How are the factor exposures calculated?

    Put simply, a raw factor score is determined for funds across each of the six factors using BlackRock’s equity risk models and holdings as of the most recent quarter. To facilitate comparisons across factors and peer funds, these raw factor z-scores2 are converted into percentile rankings based on the estimation universe. Every fund is assigned a Factor Box percentile rank between 1 and 100 for each factor.

    To determine the percentile rankings, raw factor scores are put through a process of repeated Winsorization3 and smoothing. This facilitates the translation of raw factor scores into percentile rankings, allowing for comparison across the universe of available funds and ETFs.

    For additional details, please refer to the Methodology tab.

Interpreting the Box

  • What does the Factor Box graph show?

    The Factor Box displays the strength of the selected fund’s exposure to the six different factors – value, low size, momentum, quality, yield and low volatility – relative to the exposures of the estimation universe.

     

  • What are the bars within the graph displaying?

    The bars represent the factor exposures of the selected fund relative to the exposures of the estimation universe. The length of the each bar represents the fund’s exact Factor Box percentile score to each factor.

    All bars are centered around the median 50th percentile.  For funds in the 1st to 50th percentile, the bar points the left of this center line.  For funds with exposure in the 51st to 100th percentile, the bar points to the right. 

  • How are the overweight, neutral and underweight classifications defined?

    For each factor and fund, the Factor Box percentile scores are classified into overweight, underweight, or neutral. Overweight indicates that the selected fund has a meaningfully stronger exposure to the factor as compared to the estimation universe. A fund classified as overweight falls in the 70th to 100th percentile. Underweight indicates that the selected fund has a significantly lower exposure to the factor as compared to the universe. A fund classified as underweight falls in the 1st to 30th percentile. Neutral indicates that the selected fund has a similar exposure to the factor as compared to the estimation universe. A fund classified as neutral falls in the 31st to 69th percentile.

     

Use Questions

  • How do I use the Factor Box?

    To begin using the Factor Box, search for funds within the search box located on the left hand side under Enter Funds. You can search for funds by fund name, ticker or keyword. A list of funds meeting the criteria entered in the search function will populate to the right. Select the funds that you would like to evaluate from the search list. The selected funds will then appear in a list directly below the search function. From the list, click on the fund you wish to view. The Factor Box graph will automatically populate once the desired fund is selected.

  • Why might a fund not be included within the tool?

    A U.S. domiciled and U.S. geographic focused fund may be excluded from the tool if its holdings coverage within the BFRE USAM1 risk model, the risk model driving the Factor Box tool, is below 80%. This coverage threshold is in place to ensure accurate representation of fund exposures within the tool. Reasons a fund may have holdings coverage below 80% with BFRE USAM may include meaningful allocations to non-U.S. securities, large cash balances or sizeable allocations to non-equity holdings among others.

  • Are you able compare a fund’s exposure to its average peer manager or benchmark?

    Yes, after searching for and selecting a fund, the user can add either the exposures of the median fund within its Morningstar Category peer universe or the BlackRock selected default benchmark for its peer universe by clicking on the Add Category or Add Benchmark button respectively.

  • How is Category defined and what does the Add Category button show?

    Category represents the Morningstar Category of the selected fund. The Add Category button plots the average manager’s exposure of the selected fund’s Morningstar Category or peer universe for each of the factors. The peer universe will be listed at the top of the Factor Box chart once a fund is selected.

  • How is Benchmark defined and what does the Add Benchmark button show?

    Benchmark represents the default benchmark of the selected fund’s Morningstar Category as defined by BlackRock. The assigned benchmark may differ from the fund’s prospectus benchmark. The Add Benchmark button plots the default benchmark. The default benchmark will be listed at the top of the Factor Box chart once a fund is selected.

  • What additional resources are available?

    • The Factor Box Glossary of Terms (see tab)
    • The Factor Box Methodology (see tab)

1. Style box funds necessarily have at least 80% exposure to US risk model factors. If some funds happen to be missing style box category designation yet are clearly focused on US securities, we have fallback logic in case of missing style box category. BFRE USAM is a U.S focused fundamental equity risk model estimated and maintained by BlackRock to describe the structure and sources of equity portfolio risk.

2. The z-score is a statistical measure showing how many standard deviations the fund’s exposure is away from the average exposure of the estimation universe to each factor.

3. Winsorization is the transformation of data through limiting extreme values to reduce the effect of outliers while preserving information. We use this procedure to transform the style factors to a common standardized scale.

Terminology

Factors: Fundamental drivers of security risk and returns such as value or momentum.

Value: A measure of how inexpensive a stock is relative to its fundamentals.

Low Size: A measure of the market capitalization of a company relative to companies in a given universe of stocks.

Momentum: A measure of recent strength in stock price behavior. Stocks that had positive excess returns in the recent past are grouped separately from those that displayed negative excess returns.

Quality: A measure of balance sheet strength and earnings stability.

Dividend Yield: A measure of a company’s dividend relative to its underlying price.

Low Volatility: The inverse of volatility, a measure of the risk of an asset measured by the standard deviation of returns over a particular interval of time.

Estimation Universe: A sample set of mutual funds and ETFs used to form the percentile rankings.

BFRE USAM: Fundamental equity risk models estimated and maintained by BlackRock. BFRE USAM is the U.S. model.

Raw Factor Scores or Z-score: The z-score is a statistical measure showing how many standard deviations the fund’s exposure is away from the average exposure of the estimation universe to each factor.

Percentile Ranking: A value from 0-100 assigned to each fund across each factor. Indicates the fund’s percentile ranking to the factor within the estimation universe.

Category or Peer Universe: A holding-based classification assigned by Morningstar. Funds within similar historical characteristics are classified within the same category.

Overweight: Exposure within the 70th to 100th percentile.

Underweight: Exposure within the 1st to 30th percentile.

Neutral : Exposure within the 31st to 69th percentile.

Benchmark: The default benchmark for the selected fund’s Morningstar Category. A benchmark is assigned by BlackRock based on the Morningstar Category. The assigned benchmark may differ from the fund’s prospectus benchmark.

Expense Ratio: Net expense ratio from shareholder documentation.

Standard Deviation: A statistical measure showing how dispersed returns are around the average.

 

Introduction

Investors have increasingly moved beyond traditional sector, size, and value-growth style views to factor-based considerations of their portfolios. To help investors gain insight and evaluate a fund’s fundamental drivers of return and risk, BlackRock has developed a new lens, termed the Factor Box.

The Factor Box is a complement to the traditional style box to understand the exposure of an equity fund relative to its category peers and benchmark across six different factors – value, low size, momentum, quality, dividend yield and low volatility. These six factors are broad, persistent drivers of returns over time and reflect the characteristics that managers often consider when constructing portfolios.

Factors

A definition of each factor is outlined below:

 

FactorDefinition
Value Stocks which are inexpensive relative to fundamentals
Low Size Companies with smaller market capitalization
Momentum Securities displaying positive price trends
Quality Companies with strong balance sheet and more stable earnings
Dividend Yield Stocks with a high dividend relative to price
Low Volatility Securities with low historical price volatility

Investors can use the Factor Box to understand and compare the factor exposures of various funds, and to aid in portfolio construction and risk management.

Methodology

Defining the Estimation Universe

The Factor Box U.S. estimation universe includes open-ended mutual funds and ETFs meeting the following criteria:

  • Equity funds denominated in USD that are registered under the Investment Company Act of 1940, as amended;
  • U.S. geographic focus;
  • Minimum AUM of $25MM;
  • Assigned to a Morningstar Category or have at least 90% of its assets covered within the BlackRock U.S. equity risk model (BFRE USAM)1; and
  • For funds with multiple share classes, the largest share class is used in the estimation universe, but all available share classes are assigned Factor Box scores.

Calculating Fund Factor Exposures

Style exposures for funds meeting the above criteria are then calculated based on the risk model:

  • For each fund within the estimation universe, a raw factor score is determined across each of the six factors using BlackRock’s equity risk models and fund holdings as of the most recent quarter.
  • The Factor Box first leverages raw factor scores from the BFRE USAM risk model to determine exposures to the six Factor Box style factors. In some instances, BFRE risk model exposures are combined or reversed to accurately reflect the desired style factors within the Factor Box. For example, we take the inverse of the exposures to the Volatility factor in order to reflect the desired output of exposure to the Low Volatility factor. These BFRE risk factors are z-scores2 and are mapped to the respective Factor Box factor as listed below:

 

The Factor Box FactorBRFE Components
Value Value + Earnings Yield
Low Size Inverse Size + Small Cap
Momentum Momentum – Reversal
Quality Profit – Leverage
Dividend Yield Dividend yield
Low Volatility Inverse Volatility

U.S. Large Value Fund – Sample Risk Model Output

FactorValueLow SizeMomentumQualityDividend YieldLow Volatility
Raw Score 0.77 - 0.78 - 0.10 0.07 0.34 0.08

 

  • To facilitate comparisons of factor scores between funds, and to better demonstrate relative strength of exposure, these raw factors z-scores are then converted into percentile rankings within the estimation universe. Every fund is assigned a Factor Box percentile rank between 1 and 100 for each factor.
  • To determine the percentile ranks, raw factor scores are put through a process of repeated Winsorization3 and smoothing. This facilitates the translation of raw factor scores into percentile rankings, allowing for comparison across the universe of available funds and ETFs. This helps to explain the relative magnitude of exposure.
  • Once the thresholds for percentile ranks are established, market cap weighted benchmarks and median fund exposures for each category are assigned a rank based on their Winsorized factor scores. These serve as additional comparisons for individual funds.
  • All data items are updated quarterly once holdings data is available for a sufficient number of funds.

Example

The table below provides an example:

U.S. Large Value – Sample Factor Box Percentile Ranking

FactorValueLow SizeMomentumQualityDividend YieldLow Volatility
Percentile Ranking 99 8 26 49 85 55
Peer Universe: U.S. Value

For illustrative purposes only.

Funds are displayed in the Factor Box with a horizontal bar that indicates the percentile of the exposure. All bars are centered around the median 50th percentile. For funds in the 1st to 50th percentile, the bar points the left of this center line. For funds with exposure in the 51st to 100th percentile, the bar points to the right.

Additional markers are added to the Factor Box visual to denote exposure that is considered “overweight” (70th to 100th percentile) and exposure that is considered “underweight” (1st to 30th percentile). Exposure from the 31st to 69th percentile is considered “neutral”. The classifications indicate the strength of a fund’s exposure to a factor relative to the exposure of the funds in the estimation universe.

U.S. Large Value Fund – Sample Category Assignment

FactorValue
Percentile Ranking 99

For illustrative purposes only.

The U.S. Large Value Fund has an overweight or greater exposure to the value factor compared to the estimation universe, as its percentile ranking falls above the 70th percentile.

Interpreting the Factor Box Output

The Factor Box displays the strength of the selected fund’s exposure to the six different factors – value, low size, momentum, quality, dividend yield and low volatility – relative to the estimation universe.

Overweight: An overweight indicates that the selected fund has a meaningfully stronger exposure to the factor as compared to the estimation universe. A fund classified as overweight falls in the 70th to 100th percentile.

Underweight: An underweight indicates that the selected fund has a significantly lower exposure to the factor as compared to the estimation universe. A fund classified as underweight falls in the 1st to 30th percentile.

Neutral: Neutral indicates that the selected fund has a similar exposure to the factor as compared to funds in the estimation universe. A fund classified as neutral falls in the 31st to 69th percentile.

Add Category: The Add Category button plots the median manager’s exposure of the selected fund’s peer group as defined by Morningstar. The peer universe will be listed at the top of the Factor Box chart once a fund is selected.

Add Benchmark: The Add Benchmark button plots the default benchmark as assigned by BlackRock for the Morningstar Category of the selected fund. The assigned benchmark may differ from the fund’s prospectus benchmark. The default benchmark will be listed at the top of the Factor Box chart once a fund is selected.

1. Style box funds necessarily have at least 90% exposure to US risk model factors. If some funds happen to be missing style box category designation yet are clearly focused on US securities, we have fallback logic in case of missing style box category. BFRE USAM is a U.S focused fundamental equity risk model estimated and maintained by BlackRock to describe the structure and sources of equity portfolio risk.

2. The z-score is a statistical measure showing how many standard deviations the fund’s exposure is away from the average exposure of the estimation universe to each factor.

3. Winsorization is the transformation of data through limiting extreme values to reduce the effect of outliers while preserving information. We use this procedure to transform the style factors to a common standardized scale.