Parametric wins first tax-managed factor mandate

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Parametric, the specialist implementation manager, has been awarded a $200 million global equities mandate by a big super fund. The bespoke mandate, which is worthy of a case study, addresses certain risk factors and concerns about unintended biases in factor-based portfolios.

Unfortunately, the fund’s executives have requested anonymity. It is the manager’s first factor mandate managed to after-tax objectives. The fund requested Parametric create a portfolio to capture its views around exposures to particular risk factors in global equity markets and concerns about unintended biases in factor-based portfolios.

The super fund has also asked Parametric to manage “real-world implementation frictions”, including tax. The performance of the new portfolio, seeded earlier this month, is being measured against a custom after-tax performance benchmark.

Chris Briant, Parametric Australia’s chief executive, said: “This is a breakthrough in the industry. In our discussions with super funds, we’ve seen interest in after-tax investing and factor investing growing as separate themes, so it was only a matter of time before they came together as a powerful solution.

“We’ve seen huge growth in the US for factor approaches and now around US$4 billion of our total US$230 billion in funds under management globally is in portfolios that reflect our clients’ preferences around factor exposures,” he said.

“Of course, not all factor strategies are created equal. It’s important that the design rules capture exactly what the client wants, so that the desired exposures drive performance, and not unintended bets.”

Parametric implements what it terms a “pure strategy” for its fund clients. It is agnostic to market styles and trends. While the firm is a fan of factor investing, as you’d expect, it tries to avoid “incidental” factor exposures, Briant said.

In September 2016, in a research paper, Parametric described factor investing as a “disruptive influence on active equity managers”. Raewyn Williams a co-author of that paper and Parametric Australia’s research managing director, said this, perhaps surprisingly, was a positive for active managers.

“It’s an opportunity for active managers to seek generous risk budgets to fully pursue idiosyncratic risk as a nice complement to rules-based factor strategies,” she said.

Briant said: “Super funds and their advisers have their own smart ideas about what kinds of portfolios they want. Sometimes a traditional manager will be best to make these ideas real. But sometimes, like here, what the fund will really needs is a specialist implementation manager that can maximise transparency and minimise the costs of translating good ideas into a real-world portfolio.”

– G.B.

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