dcsimg

BRINGING CLARITY TO
FACTOR INVESTING

RAISING THE BAR ON TARGETING RETURNS

We are at a critical inflection point in the industry where the lines between active and passive are blurring, and a new kind of active management is taking hold. Here we present the spectrum that is factor investing, from smart beta to active quantitative to alternatives and, ultimately, how they can help you achieve your investment objectives.

NEW FACTOR INVESTING

DEMYSTIFYING THE QUALITY FACTOR IN EQUITIES AND BONDS

SSGA researchers discuss their groundbreaking paper on capturing the quality factor in equities and fixed income

NEW RESEARCH PAPER

A Cross-Asset Class Look at Quality

JENNIFER BENDER

Director of Research
Global Equity Beta Solutions

RITI SAMANTA

Global Head of Systematic Beta,
Fixed Income
GET THE RESEARCH PAPER

Challenges

Global returns are projected to fall short of investors’ expectations.

Investors need to find a way to bridge this return gap.
Listen to Audio

Global Equities

Gap

-4.4%
10% Investor Expectation
5.6% SSGA Return Forecast

Global Fixed Income

Gap

-4.8%
5.5% Investor Expectation
0.7% SSGA Return Forecast

60% Global Equities / 40% Global Fixed Income

Gap

-4.6%
8.2% Investor Expectation
3.6% SSGA Return Forecast
Source: SSGA Investment Solutions Group as of 31 December 2015, FT Remark, 31 December 2015. FT Remark and SSGA are not affiliated. SSGA return forecast, as of 31 December 2015. The above estimates are based on certain assumptions and analysis made by SSGA. There is no guarantee that the estimates will be achieved.

Factor-based investing can help investors meet their challenges in many ways.

Listen to Audio

Enhance
Returns

  • • Harness risk premia
  • • Customize desired exposures
  • • Improve risk-adjusted returns

Manage
Risk

  • • Enhance liability matching
  • • Minimize drawdowns
  • • Improve diversification

Improve
Efficiencies

  • • Align fees with value
  • • Manage risk budget
  • • Simplify governance
Factor investing can potentially deliver similar or superior performance to traditional investment approaches, with more favorable risk/return characteristics and, importantly, at a lower cost than traditional active management.

Why Factors?

At their most basic, fundamental level, portfolios are made up of common drivers of returns, typically referred to as factors.

What are factors?

Think about your portfolio as white light. If you pass white light through an optical prism, the light separates, and you can see that white light is actually made up of many different colors, like a rainbow. Similarly, if you pass the “white light” of your portfolio through a factor lens, you’ll see that your portfolio is made up of many different factor exposures.
Listen to Audio
Macro Factors
Interest Rates
Economic Growth
Liquidity
Inflation
Style Factors
Size
Volatility
Term
Quality
Liquidity
Momentum
Value
Credit
Pure Alpha
Factor Timing
Sector Selection
Country Selection
Security Selection
Any return that cannot be attributed to a factor exposure can be attributed to “pure alpha”, or the skill provided by the manager. This skill may be specific to security selection or timing decisions.

Research has shown that a significant portion of active returns results from exposure to common factors.

Active Returns
Efficient, relatively lower-cost factor-based strategies can be utilized to capture these excess returns.
Manager Skill
Factors
This means that many active managers are being paid to outperform a benchmark, when much of that performance can be attributed to the portfolio’s exposure to common factors, not manager skill.
Source: Mok William, Jennifer Bender, and P. Brett Hammond (2014), “Can Alpha Be Captured by Risk Premia?” The Journal of Portfolio Management, Vol. 40, No.2: pp. 18-29.

We believe these factors are the most persistent in driving excess returns across asset classes.

Value
Value
Inexpensive stocks tend to outperform more expensive stocks.
Size
Size
Stocks of small companies tend to earn greater returns than stocks of larger companies.
Volatility
Volatility
Lower volatility stocks tend to generate a higher risk-adjusted return than high volatility stocks.
Quality
Quality
Healthy companies tend to outperform less healthy companies.
Momentum
Momentum
Stocks with good recent performance tend to continue earning greater returns in the near term compared to stocks with weak recent performance.
Yield Slope
Yield Slope
Longer maturity bonds tend to earn higher returns than shorter maturity bonds.
Equities
Fixed Income

Credit

Lower credit quality bonds tend to earn a greater return than higher credit quality bonds.

Liquidity

Bonds that are more difficult to trade tend to earn higher return.

Term

Longer maturity bonds tend to earn higher returns.

Getting started

Our capabilities range from more passive smart beta to more active quantitative solutions and alternative investments, across multiple asset classes.

Our Spectrum of Solutions

Smart Beta
active quantitative
alternatives

Seeks above-benchmark returns over time by tilting the portfolio toward one factor or a combination of factors.

  • Single-factor approach utilizes factors independently to target a specific risk exposure
  • Multifactor approach combines factors to provide diversification and smooth portfolios
Contact us to get started

Capture alpha by combining nuanced factors with advanced portfolio construction techniques.

  • Enhanced definitions for traditional factors
  • Proprietary factors based on manager insights and research
  • Explicit consideration of factor interaction, valuation and timing
  • Optimization balances risk and return
  • Transaction costs can be explicitly incorporated
Contact us to get started

Achieve low correlations to traditional asset classes using factor exposure, while retaining liquidity and cost-effective fees.

Long/Short
Invest long/short across asset classes and investment styles to generate returns with low correlations to traditional asset classes
Hedge-Fund
Replicate hedge-fund-like returns by harnessing the systematic risk premia of hedge-fund strategies
Contact us to get started
Multi-Asset Class Portfolio Solutions
While diversification does not ensure a profit or guarantee against loss, investors in smart beta may diversify across a mix of factors to address cyclical changes in factor performance. However, factors may have high or increasing correlation to one another.

CASE STUDIEs: Factor Investing in action

Improving risk-adjusted returns
Listen to Audio

Client Need

Higher returns with no additional significant risk.
Passive Strategy
(MSCI World Index)

Our Solution

Replace 25% of global equity allocation with a multifactor smart beta approach.
Passive Strategy
(MSCI World Index)
Smart Beta
(MSCI Quality Mix Index)

Results

A higher overall return profile and better risk-adjusted returns.
Source: State Street Global Advisors. As of 31 December 2015. Represents results for a period of 5 years to 31 December 2015. Past performance is not a guarantee of future results.
Enhancing passive fixed-income performance
Listen to Audio

Client Need

Improve returns of liability-matching passive corporate credit portfolio while maintaining duration, A-rating and fully funded status.
Passive
Portfolio

Our Solution

Implement smart beta strategy focused on credit factor. Target undervalued bonds with a tilt toward high quality to capture mispriced credit risk.
Fixed Income
Factors

Results

Achieved outperformance vs. the client’s passive approach.
Source: State Street Global Advisors. As of 31 December 2015. Past performance is not a guarantee of future results.
Dampening volatility while retaining upside exposure
Listen to Audio

Client Need

Reduce volatility while retaining upside exposure to global equities.
Benchmark Oriented
Active Global Equities

Our Solution

Replace benchmark-oriented active global equity exposure with Global Defensive Equities to maintain alpha exposure while targeting overall lower volatility.
Global Defensive
Equities

Results

Significant risk reduction during most volatile market periods versus non-defensive equity exposure.
Source: State Street Global Advisors. As of 31 December 2015. Past performance is not a guarantee of future results.
Avoiding overdiversification of active exposures
Listen to Audio

Client Need

A more cost-efficient portfolio, as factors are driving 40% of active risk and too many managers are diversifying it away.
Passive
Active Managers

Our Solution

Add smart beta to active equity allocation to capture factor exposure. Reduce number of active managers.
Smart Beta
Active Managers

Results

Reduced overall equity management fee by 30%; increased active risk and active share.
Source: State Street Global Advisors. As of 31 December 2015. Past performance is not a guarantee of future results.

PARTNERING with us

Comprehensive expertise in factor investing

$115 BILLION

in factor-based assets under management

155 Investment professionals

engaged in factor investing

16 YEARS

on average of investment experience

4 AREAS

of factor expertise: Equities, Fixed Income, Multi-Asset and Alternatives

30 YEARS

of firm-wide factor investing experience

9 geographic locations

across the world

Contact us

Fill out below to get the research paper, and learn more about how factor investing could address your investment objectives.

I agree to receive e-mails and other electronic communications containing information, news update, and other promotional material regarding State Street Global Advisors' products and services. I can withdraw my consent at any time.

Global reach, local presence
state street global advisors

Middle East

United Arab Emirates

North America

Canada United States