Equity Factor Exposures Methodology

Introduction

Investors have increasingly moved beyond traditional sector, size, and value/growth style views, embracing factor-based considerations of their portfolios as an additional source of critical information. Factors are broad, persistent drivers of returns over time and reflect the characteristics that managers often consider when constructing portfolios.

The Equity Factor Exposure Analysis in Advisor Center 360°’s Portfolio Analyzer Characteristics Tab is designed to help investors understand the factor exposures of the equity portion of their portfolio and to support portfolio construction and risk management by providing a consistent, factor‑based lens on equity risk.

Methodology

The Equity Factor Exposure Analysis scores custom portfolios uploaded into Portfolio Analyzer. The analysis is calculated with the BlackRock Fundamental Equity Risk Model (BFRE World)1 and assigns the portfolio a Z-score2 from -3 to +3 for each factor metric.

The strength of the portfolio’s factor exposures is indicated by the Z-score. If the score is 0, that means the portfolio has the same exposure as the global market’s average. If the score is above/below zero, this indicates above-/below-average exposure, respectively.

Z-score ranges from -3 (lowest exposure) to +3 (highest exposure)

Factor

Metrics

Definition (per BFRE World Model)

What does a positive (Z-score > 0) exposure mean?

Value

Value

Portfolio’s exposure to companies of different valuations

Portfolio companies look cheaper through various measures of value (Positive exposure to the value factor)

Earnings Yield

Portfolio’s exposure to companies with different earnings yield levels

Portfolio companies look cheaper through various measures of a company’s earnings (Positive exposure to the value factor)

Dividend Yield

Portfolio’s exposure to companies with different dividend yield levels

Portfolio companies provide higher dividends and look cheaper on price (Positive exposure to the value factor)

Quality

Profitability

Portfolio’s exposure to return on assets (ROA) & related measures

Portfolio companies are more profitable, therefore have higher quality (Positive exposure to the quality factor)

Leverage

Portfolio’s exposure to the various measures of indebtedness

Portfolio companies are more indebted, therefore have lower quality (Negative exposure to the quality factor)

Momentum

Momentum

Portfolio’s exposure to companies with recent price momentum

Portfolio has higher exposure to stocks that outperformed the market over the past year (Positive exposure to the momentum factor)

Reversal

Portfolio has higher exposure to stocks that have reversed in their price

Portfolio has higher exposure to stocks that have reversed in their price and are likely to mean revert (Negative exposure to the momentum factor)

Low Volatility

Volatility

Portfolio’s exposure to companies with different historical volatility

Portfolio has higher volatility (Negative exposure to the low volatility factor)

Low Size

Size

Portfolio’s exposure to companies of different market capitalization

Portfolio has more exposure to large market capitalization stocks (Negative exposure to the low size factor)

Growth

Growth

Portfolio’s exposure to companies with different historical growth

Companies in the portfolio have higher growth (Positive exposure to growth)

Displaying Exposures

The portfolio’s exposures to each factor metric are displayed in the Equity Factor Exposure Analysis visual by vertical columns. The height of each column reflects the magnitude of the portfolio’s exposure to that specific metric Typically, the longer the vertical bar, the greater the portfolio’s exposure to that metric.

Certain metrics require inverse interpretation. For example, to assess positive exposure to the low volatility factor, a downward‑facing bar for the volatility metric indicates lower volatility and therefore higher exposure to the low volatility factor.

  • Higher Exposure – A portfolio falling above a 0 Z-score typically has a higher or stronger exposure to the metric relative‑ to a universe of global stocks
  • Lower Exposure – A portfolio falling below a 0 Z-score typically has a lower exposure to the metric relative‑ to a universe of global stocks
  • Neutral Exposure – A portfolio at the 0 Z-score has a similar exposure to the metric relative‑ to a universe of global stocks

In addition, the Equity Factor Exposure Analysis visually displays the portfolio’s exposures relative to the selected benchmark by selecting the “vs Benchmark” button. If the portfolio’s exposure to a specific metric is greater than the reference benchmark’s, the portfolio’s exposure, as indicated by the length of the vertical bar, will plot higher (higher Z-score). If the portfolio’s exposure to a specific metric is lower than the reference benchmark’s, the portfolio’s exposure, as indicated by the length of the vertical bar, will plot lower (lower Z-score).

1BFRE World Risk Model is a global fundamental equity risk model estimated and maintained by BlackRock to describe the structure and sources of equity portfolio risk.

2The Z-score is a statistical measure showing how many standard deviations the fund’s exposure is away from the average exposure of the estimation universe to each factor.

Glossary

BFRE World Risk Model: Fundamental equity risk model estimated and maintained by BlackRock. BFRE World Risk Model is the global equity model.

Factors: Fundamental historical drivers of security risk and returns such as value or momentum.

Higher exposure: Exposure above a 0 Z-score.

Lower exposure: Exposure below a 0 Z-score.

Low Size: A measure of the market capitalization of a company relative to companies in a given universe of stocks.

Low Volatility: The inverse of volatility, a measure of the risk of an asset measured by the standard deviation of returns over a particular interval of time.

Momentum: A measure of recent strength in stock price behavior. Stocks that had positive excess returns in the recent past are grouped separately from those that displayed negative excess returns.

Neutral exposure: Exposure at the 0 Z-score.

Quality: A measure of balance sheet strength and earnings stability.

Raw Factor Scores or Z-score: The Z-score is a statistical measure showing how many standard deviations the fund’s exposure is away from the average of a universe of global stocks.

Standard Deviation: A statistical measure showing how dispersed returns are around the average.

Value: A measure of how inexpensive a stock is relative to its fundamentals.

FAQ

  • The Equity Factor Exposure Analysis is Analysis is an analytical view within Advisor Center 360°’s Portfolio Analyzer Characteristics Tab. Investors can use the Equity Factor Exposure Analysis to understand the equity factor exposures of their portfolios and to aid in portfolio construction and risk management. The Equity Factor Exposure Analysis analyzes and depicts portfolio exposures across multiple factor dimensions.

  • In 1992, Morningstar introduced the Style Box, which provided a simple way for investors to construct portfolios by viewing securities, funds, and portfolios across two dimensions or exposures – market cap/size (large versus small) and fundamentals/style (value vs growth). Size and value are among the earliest understood rewarded drivers of risk and return to be adopted broadly. More recently, academic research, empirical data, and investor experiences indicate additional persistent drivers of risk and return (momentum, quality, volatility) and other important dimensions of portfolio construction. The Equity Factor Exposure Analysis in Portfolio Analyzer provides the opportunity to evaluate portfolios across these important factors as opposed to focusing solely on value and size.

  • The Equity Factor Exposure Analysis can be used in a variety of ways to manage risk and diversification. We find the most common applications are to help investors:

    • Understand and evaluate the factor exposures of a portfolio and compare exposures to those of an index or another portfolio
    • Identify gaps in exposures across a portfolio
    • Identify ways to achieve similar factor exposures with lower cost alternatives

  • Factors are fundamental historical drivers of investment returns. While hundreds of factors have been identified by academics and market practitioners, only a few are known to be broad (exist across asset classes), persistent (work across market cycles), historically rewarded, and well-documented‑ by academic research. For this reason, the Equity Factor Exposure Analysis includes five rewarded factors – value (represented by the value, earnings yield, and dividend yield metrics), low size (represented by the size metric), momentum (represented by the momentum and reversal metrics), quality (represented by the profitability and leverage metrics), and low volatility (represented by the volatility metric), as well as growth (represented by the growth metric). While growth is not a historically rewarded factor, growth is a characteristic that helps explain portfolio risk.

  • Factor

    Definition

    Value

    Stocks that are inexpensive relative to their fundamentals

    Low Size

    Smaller, more nimble companies

    Momentum

    Stocks with strong recent returns

    Quality

    Companies with healthy balance sheets and stable earnings

    Low Volatility

    Securities with low historical volatility

  • BlackRock’s multifactor equity risk model, the BlackRock Fundamental Risk for Equities Model (BFRE World), is the source for exposure data for the Equity Factor Exposure Analysis in Portfolio Analyzer. This risk model uses company fundamentals and historical market data to assess the risk profile of equity assets and portfolios.

  • The Equity Factor Exposure Analysis displays the strength of the selected portfolio’s exposure to the different metrics relative to the exposures of the global market average.

  • The Equity Factor Exposure Analysis defines a portfolio’s factor exposures through Z-scores. The Z-score is a number from 3 to +3 that indicates the strength of the portfolio’s exposure to the metric. A positive Z-score indicates the portfolio has higher exposure to the metric relative to a universe of global stocks, and a negative Z-score indicates the portfolio has lower exposure to the metric relative to a universe of global stocks. A portfolio with a Z-score of 0 has a similar exposure to the metric relative to a universe of global stocks.

  • Factor exposures can be defined by one or more metrics. The below table shows which metrics are associated with each factor.

    Rewarded Factor

    Metrics

    Definition (per BFRE World Model)

    Value

    Value

    Portfolio’s exposure to companies of different valuations

    Earnings Yield

    Portfolio’s exposure to companies with different earnings yield levels

    Dividend Yield

    Portfolio’s exposure to companies with different dividend yield levels

    Quality

    Profitability

    Portfolio’s exposure to return on assets (ROA) & related measures

    Leverage

    Portfolio’s exposure to the various measures of indebtedness

    Momentum

    Momentum

    Portfolio’s exposure to companies with recent price momentum

    Reversal

    Portfolio’s exposure to the companies one-month return capturing short‑-‑term overreaction

    Low Volatility

    Volatility

    Portfolio’s exposure to companies with different historical volatility

    Low Size

    Size

    Portfolio’s exposure to companies of different market capitalization

    Growth

    Growth

    Portfolio’s exposure to companies with different historical growth

  • It depends – factors are the long-term drivers of returns. Above-average exposure to certain return-enhancing factors such as quality, value, low size, and momentum can lead to outperformance over the broad market in the longer-term. Other factors such as low volatility can be used to reduce portfolio risk. The appropriate exposure to a particular factor will ultimately depend on your investment objectives and economic views.

  • The Equity Factor Exposure Analysis in Portfolio Analyzer displays factor exposures at the portfolio level. The experience does not currently allow for viewing factor exposures of individual funds or holdings within the portfolio. To view the factor exposure of individual U.S. equity funds, contact your BlackRock Relationship Manager.