Factor based investments are made by investors who seek to understand, predict and take advantage of the forces which drive the returns of stocks, bonds and other assets. Often these factors can be categorised as style factors.
Understanding factors becomes important during successful portfolio diversification. As many factors occur independently of each other, some factors and asset classes tend to perform better than others at different stages of the economic and market cycle.
As one of the UK’s leading investment managers, LGIM offers knowledge and experience that can bring real benefit to investors through factor-based investing. We have over 20 investment professionals working on factor-based investing, and has a 10-year track record in delivering factor-based strategies ranging from simple factor indices, to off-the-shelf funds and more customised bespoke solutions.
Our Asset Allocation team includes dedicated and experienced economists, strategists and portfolios, who combine their expertise to deliver clear client outcomes.
True diversification requires looking for independent return streams. You normally cannot rely on the weather, but in investments that lack of reliability is an interesting feature.
As we continue our voyage on the factor premium drivers, our next destination is 'market structure'.
Evolutionary psychology highlights a Stone Age mentality hardwired into our brains and reflected in our behaviour and habits. For example, we tend to organise ourselves into groups in order to adapt more easily to different environments: behaviourally it is far less dangerous to be wrong in a group than to be right on our own. This explains the desire and impulse of an individual investor to follow the crowd.
Soviet-era Polish cinematography is often a source of seemingly absurd catchphrases repeated for generations. “How much sugar is in your sugar” is a classic one from the quirky professor in the 1973 comedy Man-Woman Wanted. When we target particular factors within our equity exposures, I increasingly find myself taking on the role of the professor as I try to answer the question “How much factor is in my factor?”. It might seem like an odd question but we can answer this by relying on simple factor definitions and a holistic approach to combining factors. It’s only once we know what our true exposures are, that we can consider how we avoid any unintended secondary exposures that have the potential to sour the overall outcome.
In my recent post "What to factor in and what to factor out?," I explained what the ‘factor’ in factor-based investing really means. While its acronym (FBI) gives the impression that it's rather complex, like the US organisation, investors have been increasingly looking to factor-based investing to drive their investment returns. It's time to consider why...
Factor-based investing has seen rapid growth since the financial crisis, as investors look beyond traditional asset class labels to understand what really drives the performance of their portfolios. Bombarded with new products and an ever-growing body of research, what should investors focus on before jumping on the factor bandwagon?