Here’s a party trick: how many factors are there? Most investment professionals can name a dozen or so. Chris Briant, the managing director of Parametric Portfolio Associates in Australia, believes there are at least “several hundred” but only a handful that really matter.
Parametric, the global specialist implementation manager, has recently started to push its factor-investing capabilities in Australia, where Briant says there has been a lot of interest although not many super funds have as yet embraced specific factor strategies.
Parametric this year passed the A$250 billion mark for total funds under management, about A$5 billion of which is in specific factor-based strategies. In Australia the firm has a lot of money in after-tax efficiency processes, known as ‘centralized portfolio management’, in which it has a long history. In recent years the firm has broadened its offering for this region. Efficiency and value for money tend to be its mantras.
In theory, there is an unlimited number of factors – a factor being merely a systematic collection of drivers of stock prices, including risk premia, and their correlations. Given that investing tends to be as much art as science, sometimes the correlations are spurious and always there are cycles for each factor identified. The value cycle, for instance, tends to be longer than the momentum cycle.
Briant said: “Superannuation funds understand that manager alpha is inherently uncertain, but fees, taxes and transaction costs are certain, and these are sensible things to manage.
“A natural way for superannuation funds to start integrating implementation efficiency is by considering it as part of new approaches, like factor investing. This is an area that’s gaining not only considerable momentum in Australia, but also globally.
“Many superannuation funds are considering factor investing, but few have adopted it. With the right factor approach, they can get a custom solution that ticks the boxes not only on factor, but also on tax management and implementation efficiency.”
He said that Australian funds were particularly interested in how Parametric’s US clients were using factor-based portfolios.
“We are currently working with two superannuation funds on their specific factor ideas and several other funds have asked that we share our broader research results,” he said.
Parametric’s factor research covers three key areas:
- how to eliminate unintended sector and factor bets
- how to target outcomes of importance to the fund such as tracking error, turnover and volatility, and
- how to ensure that the extra performance that the fund hopes to generate through a factor approach is not eaten away by the extra tax the fund must pay.
Briant said: “While there are theoretically hundreds of factors that investors can choose to target, in the US, most of the interest boils down to these five – dividend yield, value, quality, momentum and low volatility.”
‘Quality’ had seen a recent upsurge in interest and there was also interest in blending factors, particularly the value/momentum/profitability and value/size/profitability combinations, he said.
Parametric’s role was not to take a view on which factors would outperform, and how to time factors, but to take the super fund’s own thinking on these and work to create a clean, transparent, efficiently implemented live portfolio to reflect the fund’s own ideas.