Factor investing showing promise

20-Sep-2016

By Jerome Doraisamy

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Factor-based investing had the ability to produce the best of both worlds between passive index investing and traditional active management by seeking greater exposure to stocks with desired factor risks to produce superior returns, according to Parametric.

Speaking to financialobserver about its new research report to be released this week, “Factor investing: a new paradigm for superannuation funds and investment managers”, the firm said better fees, transparency and increased returns would increasingly lead more investors towards factor investing, particularly super funds that were trying to decrease costs without compromising returns.

“It’s an opportunity for super funds to distinguish themselves competitively – if they are faced with a regulatory regime that puts a lot of pressure on fees and costs, that can help them enhance returns relative to their competitors and keep costs lower,” Parametric chief investment officer Paul Bouchey said.

Parametric director of research and after-tax solutions Raewyn Williams agreed, saying factor investing offered super funds the chance to evolve and embrace change.

“In the same way that Uber came along and offered a lot that taxi services didn’t, this is an investment disruptor which actually provides a lot of confidence for members of the super industry to say we can embrace, adapt and evolve to better practice,” Williams said.

“The funds that understand this and can use it to their advantage will have a competitive edge, [whereas] those who cannot and go about things traditionally will be more at risk.”

The pair noted another advantage of factor-based investing was having a more systematic, diversified investment approach through which one could generate more efficient after-tax returns.

“Naturally, the passive index portfolios are a little more tax efficient because you can buy and hold for a long period, and when you go full active where there is full turnover, tax can be a real issue,” Bouchey said.

“Our focus is making all of these different realms more tax efficient through passive indexes and factor strategies, so you don’t have to give up those extra returns.”

Such strategies were not without their challenges, they noted, such as properly managing tax considerations and constructing an inexpensive portfolio with low volatility.

But for investors who were able to properly manage those challenges and have the conviction to withstand down movements in the market, longer-term premium would be available, they noted.

“The investors that will be successful are those who have this longer-term view,” Bouchey said.

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