The implementation of factor investing can take many forms, from single
factor exposure to one that incorporates a combination of factors. The
expanding ETF product universe has variations that range from single to
multi-factor approaches across both “smart beta” to more recent
actively-managed options, like the suite of Quant-Shares ETFs powered by AGFiQ
launched earlier this year. As of February 2017, actively-managed and
strategic beta ETFs collectively accounted for 26.8% of total ETF assets, a
7.3% increase over the past three years*.
In what follows, we’ll first look at the building blocks of factor
investing, and then consider how utilizing innovative multi-factor
approaches can help you meet the challenges of an increasingly difficult
and complex market environment.
A factor is a characteristic of a stock, for example, value, momentum,
size, or quality, that is correlated with past returns and is expected to
be correlated with future returns. For examples, see the box below.
Correlation does not imply a cause-and-effect relationship. It simply means
that you will likely see positive returns when the factor is present.
Research shows that the correlation between factors and positive returns
has been largely stable over time.
Considering that investment performance is driven by various factors, it is
important to note, as you can see in the table below, that over long
periods of time, these factors can go in and out of favour at different
points in the market cycle. In fact, the return differences by individual
factors year to year can be significant. For example, momentum gained
19.91% in 2007 only to lose 39.92% in 2008.
Fund managers who use a factor-based investment approach do something
similar with their investment screening. Instead of manually analyzing each
stock themselves to see if it meets their criteria, advances in technology
now provide managers with sophisticated tools to quickly assess thousands
of stocks, automatically eliminating the ones that don’t exhibit the
factors they are looking for. Stocks that meet the manager’s factor
criteria may be added to the portfolio.
Factor-based investing seeks to achieve specific risk and return outcomes,
away from a market-cap-weighted index. A single factor-based approach – for
example, low volatility – in an effort to manage downside protection, may
limit the potential for up-market participation and create underlying
concentration risks from investing too heavily in one country, one sector,
or one type of security.
A multi-factor approach solves for portfolio diversification and
concentration risk. This approach may provide both better upside capture
and effective risk management, benefits not offered when concentrating on a
Multi-factor Approach + Active Management = Better Outcomes
At AGFiQ, we take a multi-factor approach that solves for various types of
risk by analyzing over 140 factors – well beyond the four basic indicators
presented earlier. Our active management approach allows us to evaluate
risk differently and provide better downside protection while still
allowing for upside participation. Through a wider universe of factors to
screen securities against, there is greater potential to determine which
factors are the actual drivers of performance, with a goal of maximizing
investors’ wealth. Furthermore, when you solve for multiple types of risk,
you can better focus on generating alpha without taking undue risk.
We believe the result is a fund that is both market responsive and risk
aware, built on proven methods and research, plus the precision and
consistency of cutting-edge technology. A true integration of the
efficiencies of sophisticated technology, the science, with that of active,
intelligent portfolio construction and oversight, our art.
*Source: Investor Economics Insight, Investment Funds Advisory
Service – Canada, March 2017.
Jay Bhutani is Senior Vice-President, Head of ETF Strategy at
AGF Investments Inc. This article first appeared in the Spring 2017 issue of
Your Guide to ETF Investing, published by Brights Roberts Inc. Used with permission.
Notes and Disclaimer
© 2017 by Fund Library. All rights reserved. Reproduction in whole or in
part by any means without prior written permission is prohibited.
AGFiQ Asset Management (AGFiQ) is a collaboration of investment
professionals from Highstreet Asset Management Inc., a Canadian registered
portfolio manager, and FFCM, LLC, a U.S. SEC-registered adviser. This
collaboration makes up the quantitative investment team. QuantShares are
ETFs offered by AGF Investments Inc. and managed by Highstreet Asset
Management. QuantShares ETFs are listed on the Toronto Stock Exchange and
may only be bought and sold through licensed dealers.
There is no guarantee that the ETFs will achieve their stated objectives as
there is risk involved in investing in ETFs, which are outlined in their
relevant prospectus. Before investing, you should carefully consider each
ETF’s investment objectives, risks, charges and expenses. Commissions,
management fees and expenses all may be associated with investing in
QuantShares ETFs. The ETFs are not guaranteed, their values change
frequently and past performance may not be repeated. Please read the
prospectus carefully before you invest. A copy is available on AGFiQ.com.