Applying factor insights to equity portfolios

Andrew Ang, PhD| Sunil Shah| Trey Heiskell, CFA |Sep 28, 2018

Factor analysis can help investors with their manager selection process

Style factors can be used to better understand active manager returns and to help determine whether managers are delivering true alpha. Investors may be able to improve risk-adjusted returns, increase diversification and lower fees by replacing active managers that are not delivering unique alpha.

We believe that investors can potentially enhance equity portfolios by adding style factor strategies alongside index and more conventional active choices. In such a portfolio, each investment approach fills a unique role.

  • Index strategies seek to provide low-cost, diversified market exposure and can serve as the anchor for strategic benchmarks in target risk allocations.
  • Style factor strategies seek to provide incremental returns by exploiting top-down insights to target historically broad, persistent, well-documented sources of return such as value, momentum and quality that exist within asset classes.
  • Alpha-seeking strategies seek to provide differentiated alpha after accounting for factor exposures, by exploiting bottom-up insights to target unique, transitory sources of return.

The right mix for each investor will differ based on a number of variables including risk tolerance, investment philosophy, fee sensitivity, and desired outcomes. Whatever their goals and beliefs, now is an opportune time for all institutions to examine both their total equity portfolio and their roster of active managers with a factor lens.

Adjusting the mix
Different combinations of active, index and factor strategies can target different objectives

Adjusting the mix

Source: BlackRock, June 2018. For illustrative purposes only.

Andrew Ang, PhD
Andrew Ang, PhD
Managing Director, Head of Factors, Sustainable and Solutions for BlackRock Systematic
Andrew Ang, PhD, Managing Director, is Head of Factors, Sustainable and Solutions for BlackRock Systematic. He also serves as Senior Advisor to BlackRock Retirement ...
Trey Heiskell, CFA
Senior Investment Strategist for BlackRock's Factor-Based Strategies Group
Sunil Shah, CFA, ASA
Head of Client Insight Unit, Senior Portfolio Consultant