Differentiating Products Using a Factor Framework: A Presentation from AIMSE UKThursday 27th April, 2017
As factor-based investment products and strategies become increasingly prolific and sophisticated, it’s paramount for associated analytics to evolve at the same pace. Dr. Peter Hopkins, COO of Style Research, recently addressed this topic at the AIMSE Europe Consultants Conference, held on April 25th, 2017. Peter discussed new methods to incorporate a consistent, factor-based approach across market performance, peer group comparisons and individual portfolio analytics to differentiate investment products.
Why Factors Are Your Friends
Not only have factors become increasingly prevalent in investing, but they continue to enable participants in the industry to design innovative products and new ways to differentiate their offerings from the crowd. This applies to fund managers and consultants who are creating and selling products, as well as to investors who are seeking deeper understanding of the products they are considering.
The factor-based framework that Peter presented considered some of today’s most popular factors while also taking into account their specific details. For example, Cashflow/Price and Dividend Yield should be considered individually, rather than bundling them together as a composite indicator of Value. This process allows for deeper comparisons of what’s driving Value and identifies which factors might have greater associated risk.
A factor-based approach also surfaces insights into market performance, providing valuable context for analyzing behavior of peer groups and individual portfolios. Which factors dominated performance across a region, or an entire sector? Which portfolios benefited from that performance considering their respective positioning? Taking this factor-by-factor framework even deeper provides the opportunity to identify points of differentiation across peer groups and between specific funds.
Case Study: Comparing Two Actively Managed Funds
Peter presented a case study comparing two funds with similar portfolio construction and risk. Considering factor returns in the market and each fund’s underlying exposures, the factor-based approach revealed some unexpected differences. With both funds having similarly high exposure to the best-performing factor, how might you explain their different levels of performance? Peter explored the details that lead to deeper comparison and identification of unforeseen differences.
See More Ways to Apply the Factor-Based Framework
With factors becoming mainstream across investment products and benchmarks, there needs to be a consistent approach to comparing investment products on a neutral playing field.
Learn more about the benefits of a factor-based framework to highlight differentiation between investment products and achieve a greater understanding of product positioning.