Advisors should consider multi-factor investing as a way to gain the upside potential of factor-based strategies while reducing the risk of poor timing associated with single-factor investing, according to a recent white paper published on Pensions&Investments.
Solid Long-Term Returns, Tricky Timing
Smart beta strategies, including quality, momentum, value and low volatility, produce solid long-term returns, according to the white paper by Andrew Innes, senior analyst in global research and design at the S&P Down Jones Indices. But all of these single-factor equity strategies exhibit cyclical performance, according to the white paper. Timing the strategies correctly takes “considerable foresight” — or luck, Innes writes.
Meanwhile, there’s actually a low correlation between the returns of each smart beta strategy, which means that combining them can achieve a desirable diversification effect, according to the white paper. Thus, a multi-factor approach allows investors to tap into the performance of single-factor strategies while lowering the risk inherent in choosing between them, Innes writes. But there’s a difference between multi-factor investing approaches, according to the white paper.
A top-down, index of indices multi-factor strategy approach may end up with poor exposure in each of the target factors, according to the white paper. A bottom-up, stock-level approach, on the other hand, can boost exposure to each desired factor, Innes writes.
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Posted by: The Wealth Advisor
