Warburg Multi Smart Beta
Efficient factor investing without dilution effects
Efficient factor investing without dilution effects
Smart Beta is simply a different term for factor investing. Ultimately, stocks are not weighted based on their market capitalization but on fundamental and technical characteristics such as balance sheet quality or volatility.
There is impressive empirical evidence, that over longer periods of time such factor portfolios show more attractive properties than the benchmark or randomly generated portfolios.
The following graph displays the return-risk-combinations of 500.000 simulated and randomly generated portfolios from 12/31/2003 to 09/30/2015. All portfolios are based on the historical composition of the STOXX Europe 600. In addition, we calculate seven technical or fundamental factor portfolios. These portfolios focus on a specific, return relevant “topic”. For instance, the factor portfolio “balance sheet quality” contains 100 stocks from the STOXX Europe 600 with an above-average balance sheet quality. It is striking, how positively those factor portfolios deviate from the benchmark and the cloud of randomly generated portfolios with regard to their return.
Smart Beta is a hybrid. The approach is passive as smart beta portfolios are strictly rule-based and reproducible. There are no discretionary decisions. At the same time the approach is active as the strategy seeks a positive return compared to classical benchmark portfolios and exhibits few similarities in structure.
There is no such thing as “the ultimate” smart-beta-factors. However, in sciences and in practice there is broad agreement on seven factors which are sufficient to manage portfolios.
The table below outlines economic reasons and considerations derived from behavioural finance theory which explain why those factors are attended by risk premia.
Valuation |
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Profitability |
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Balance sheet quality |
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Earnings revisions |
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Size |
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Volatility |
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Momentum |
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The answer must be “no”. In the past, there was no distinct pattern implying any systematic over-performance as can be seen in the table below. The table displays the annual performance data of various factor portfolios.
It is certainly reasonable to combine different factors rather than selecting one single factor. However, the devil is in the detail.
Investing in different factor portfolios simultaneously is suboptimal. Single-factor portfolios are constructed by producing the highest exposure to one single factor. While there is also exposure to the remaining factors, this is uncontrolled. If single-factors portfolios are combined, the interdependencies produce dilution effects. A reason for this is conflicts of objectives between the characteristics of different factor portfolios. For example, an undervalued portfolio is generally more volatile than an expensive portfolio.
As a solution Warburg-Multi-Smart-Beta is optimized on portfolio level, with the result that the portfolio is highly and equally exposed to all factors.
Please tell us which descriptions fits you best.