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Factor Commentary

An introduction to
macroeconomic factors

Andrew Ang, Phd| Ked Hogan, PhD |Nov 8, 2016

Macroeconomic factors are important in diversifying portfolios.

Investing today is harder than ever amid uncertain earnings growth and periods of high market volatility. To navigate these challenges, many investors diversify their portfolio across stocks and bonds.

However, even a well-diversified portfolio may still be exposed to tremendous risk given the historically high correlation between the performance of a traditional 60/40 balanced strategy and equity markets. The problem is that a seemingly unrelated collection of assets can still be exposed to common sources of risk—like inflation, central bank policy moves, or a slowing global economy. As a result, the diversification that investors need can often be very difficult to find.

The good news is that factor investing can potentially deliver more effective diversification to help investors achieve their investment goals. Factor investing is about identifying and precisely targeting broad, persistent and long recognized drivers of returns.

BlackRock’s research suggests that we can explain more than 90% of the returns across asset classes through six primary drivers of returns, or factors. Economic Growth, Real Rates and Inflation are the most important drivers of returns across asset classes; Credit, Emerging Markets and Liquidity are also important drivers to understand and manage, particularly in times of crisis. Over the long run, our research has shown each of these have delivered a positive return due to bearing additional risk.

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Economic growth

The reward for taking on the risk of economic uncertainty

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Real rates

The reward for taking on the risk of interest rate movements

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The reward for taking on the risk of changes in inflation

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The reward for taking on default risk

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Emerging markets

The reward for taking on political and sovereign risks

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The reward for holding illiquid assets

These six macroeconomic factors are the building blocks of asset class returns, and multiple factors can impact individual asset classes. We believe that navigating today’s markets requires a balanced mix of these macro factors.

Andrew Ang, PhD
Head of BlackRock’s Factor Based Strategies Group and author of Asset Management: A Systematic Approach to Factor Investing
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Ked Hogan, PhD
Head of Investments for BlackRock’s Factor-Based Strategies Group