DECIPHERING FACTOR DRIVEN RETURNS

THE CHALLENGE

How can I avoid paying too much for factor-driven returns?

The evolution of factor investing has prompted wealth managers to look closer at the factor exposures within client portfolios for tilts or biases.

These exposures could be intended or accidental as a by-product of fund and security selection. By reviewing the underlying factor exposures, investors can be more aware of what is driving returns and create a more efficient portfolio.

THE ACTION

BlackRock can help with decomposing drivers of returns.

In this case, we identified, by breaking down the excess return of some of the client’s existing alpha-seeking managers, a large portion of returns generated could be attributed to static exposures from factors, and not from ‘pure alpha’.

Manager return decomposition

Source: BlackRock, as at May 2020.
For illustrative purpose only.

Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.

THE OUTCOME

The client opted to reduce reliance on alpha-seeking managers, instead intentionally targeting specific factors and index exposures through low-cost solutions.

WHY INDEXING?

Recognising that this alpha-seeking manager’s outperformance was tied to static factor tilts, the client realised that they were potentially overpaying for returns.

By taking a more balanced allocation across index, factors and alpha, the client was able to maximise the efficiency of their risk and fee budget.

WAYS WE CAN HELP YOU

From case studies to full outsourcing, explore how our portfolio solutions can help you rethink your portfolio.

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