Multifactor:
The Triathlete of Finance

Capital at risk. All financial investments involve an element of risk. Therefore the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

Multifactor strategies can provide a simple solution to investors looking for a new way to seek returns. But how do they work?

Similar to how a triathlete is strong across a number of athletic pursuits, a multifactor strategy selects stocks that demonstrate attributes of multiple drivers of long-term returns (“factors”) to seek above market returns.
Stacking up against the competition
The iShares Edge MSCI Europe Multifactor UCITS ETF, have delivered a performance in excess of the broad equity market beating 9 out of 10 managers in the Morningstar Europe Large-Cap Blend Equity category since launch, while charging less than 96% of these funds.1
01/10/2013
31/10/2014
01/10/2014
31/10/2015
01/10/2015
31/10/2016
01/10/2016
31/10/2017
01/10/2017
31/10/2018
iShares Edge
MSCI Europe
Multifactor
UCITS ETF
-
-
2.93
17.33
4.19
Peer Group
Median
4.19
5.23
0.36
14.80
0.93
MSCI Europe
Index
3.39
2.61
1.80
16.26
1.47
Past performance is not a reliable indicator of current and future results and should not be the sole factor of consideration when selecting a product or strategy.
1 Morningstar, as of 31/07/2018. Performance shown is NTR and for the period 01/10/2015 – 31/07/2018. Peer group consists of all open end funds within the Morningstar Europe Large Cap Blend Equity category. Oldest share classes are selected.
For illustrative purposes only.
What are the
factors?
Every investor is exposed to factors.
But what are some examples of factors?
Quality
Momentum
Size
Value
Minimum
Volatility
Active managers have been targeting drivers of return, such as value or quality, for decades. And they’ve done so for good reason. Each of these strategies (or “factors”) have been rewarded over time and can help investors either seek enhanced returns or potentially reduced risk.
There are four factors that are
associated with enhancing returns:
Value
Let’s look first at the value factor. This is when investors seek to identify companies that are lower in price, relative to the fundamentals the market has used to value them. Value investing has been a style of investing since 1934 when Graham and Dodd laid out the concepts in a book that is still the bible of many active managers today2.
2 Source: Security Analysis - Graham & Dodd - 1934
Momentum
Another example is momentum. If you’ve been tempted to pile in on a hot stock blazing on an upward trend, you were contemplating momentum investing.

It’s the concept that winning stocks continue to win.
Quality
Third, Quality – or identifying companies with healthy balance sheets and earnings was first recognized in the 1930s by the same Colombia professors who discovered value investing.

Quality investing is based on the idea that companies with healthier balance sheets make better use of their capital.
Size
Finally, size. If you’ve considered hiring a small cap manager before, you were pursuing size as a factor.

Small cap investors may be compensated for taking more risk. Small companies are more sensitive to business cycle contractions and are more illiquid.
How do factors perform?
Even though each of these factors has been rewarded over time,
their performance over the short-term can vary.
For illustrative purposes only.
Knowing where we are in the business cycle can be a challenge.
Multifactor strategies provide access to value, quality, size and momentum in a single ETF. This means you don’t need to try to time the factors based on where we are in the market cycle. You get access to all the rewarded factors in one, providing a diverisifed approach to long-term outperformance.

But how do multifactor strategies select the stocks to ensure maximum exposure to these characteristics?
How does multifactor work?
Let’s take a look at our triathlete.
A triathlon is an incredibly demanding sport that requires a person to be strong in three different pursuits (or characteristics): swimming, cycling and running.
Unlike a sprinter, who might be an excellent runner but unable to ride a bike...
The triathlete is strong across multiple sports, and many would say is a much better athlete overall!
A multifactor strategy is similar.
It seeks to identify certain stocks that exhibit exposure to multiple characteristics. Instead of athletic ability, this is: value, quality, momentum and size.
Value
Quality
Size
Momentum
This approach means that only the stocks that exhibit multiple characteristics will be selected.
Value
Quality
Size
Momentum
Those that are particularly strong in a certain characteristic, such as our sprinter, won’t make it into the index.
Value
Quality
Size
Momentum
How to get started?
Sound good but don’t know where to get started?
Multifactor strategies can be used in a variety of ways.
Let's explore more.
Investors could consider using multifactor to enhance the core of their portfolio. Due to its broad exposure across sectors, a multifactor strategy could be used alongside traditional index strategies to help you enhance your beta, or core market exposure.

In addition, investors could consider adding a multifactor strategy to complement an existing allocation to active managers.

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