Initial moves by Asia-based institutional investors into smart-beta equity strategies have focused on specific factors, but money managers say current and prospective clients are beginning to consider a broader range of factors and how to combine them.
Most industry research remains focused on single factors — low volatility, value, quality or momentum — but the question of “how you combine those over time ... is where investors are going now,” said Kevin Hardy, a managing director and head of BlackRock Inc.'s Singapore office, in an Aug. 24 interview.
A central question in that discussion is whether to use single-factor portfolios as building blocks, or instead pursue a bottom-up approach, employing a rules-based mechanism to select stocks offering the best mix of factors sought by a client.
While it's still early days, a number of analysts say the evidence points to the bottom-up approach being more efficient and effective.
If a client wants exposure to value and momentum, then pairing a portfolio of value stocks that do well, mediocre and poorly from a momentum perspective and a portfolio of momentum stocks that do well, mediocre and poorly on a value perspective is less efficient than selecting stocks on the basis of both factors, said Seth Weingram, a senior vice president and investment strategist with Boston-based quant firm Acadian Asset Management LLC.
“Single-factor implementations have their role (but) multifactor is where you get the juice,” added Churchill G. Franklin, Acadian's CEO, in an e-mail. Optimizing factor exposures simultaneously rather than building from single-factor pieces is key to avoiding dilution effects and “unintentional exposures,” he said.
Mr. Weingram added the bulk of Acadian's $69.7 billion under management is in multifactor strategies.