The key to building a successful portfolio for retirement plans is to focus on what drives specific assets rather than the assets themselves, Greg Williamson, chief investment officer of the American Red Cross, said Monday.
"Instead of investing in things" like equities and fixed-income securities, "it's better to invest in the things that drive those things," said Mr. Williamson, describing his strategy for factor-based investing during a panel discussion at Pensions & Investments' annual Global Future of Retirement conference, in New York.
Factors offer more options for plan sponsors than the market as a whole, leading to the building of a more efficient and effective portfolio, Mr. Williamson said during the panel discussion on "Revising the Framework for Managing Retirement Assets."
Mr. Williamson said he uses 10 to 12 factors in assembling the American Red Cross portfolio. He counseled attendees to make sure they are clear on how they define a factor when making investment choices because "there are no real benchmarks" for factors. If, for example, there are 15 different definitions of value, "you have to decide how you define value" before using this factor in portfolio construction.
Some common factor premiums are volatility, leverage and momentum, said Roger Ibbotson, emeritus professor of the practice of finance at the Yale School of Management. Mr. Ibbotson noted that one study, published last year, identified 316 potential factors.
In his presentation, Mr. Ibbotson cited 11 factors, emphasizing he was "not certifying" them by mentioning them. Other factors identified by Mr. Ibbotson are growth, value and liquidity.
Gregoire Haenni uses factor-based risk analysis to manage investments for the Caisse de prevoyance de l'Etat de Geneve (the pension fund of the State of Geneva) in Switzerland,
The goal is to identify "the main market risk drivers" across the entire portfolio, said Mr. Haenni, the pension fund's CIO. Rather than rely solely on asset allocation, he looks at other investment influences such as liquidity and leverage. He said he also performs simulations "based on the sensitivity of the portfolio to market risks."
Mr. Haenni said the biggest risk for investors is a low-yield and low-return environment. To address this issue, he focuses on diversification of assets and allocating risk as well as capital. He uses factor-based risk analysis to achieve a balance between risk and return.