Defensive Driving Presentation Defensive Driving Presentation (Construction Vehicle Hazards)
Factoring in volatility: building a defensive factor portfolio...Factoring in volatility: building a...
5
2019 Market Insights For Investment Professionals An update from the Asset Allocation team Factoring in volatility: building a defensive factor portfolio Nervy investors are eyeing top-heavy market-cap indices with suspicion. But how can they use factors to navigate the trade-off between diversifcation and concentration risk? Andrzej Pioch is a fund manager in the Multi-Asset Funds team. Imagine a world where countries were physically as big His responsibilities cover the as the size of their stock markets. A handful of countries portfolio management and would occupy most of the space. The US would take up on-going development of both nearly 60% of the Earth’s surface area! By contrast, some institutional and retail multi- of the biggest geographical countries would shrink asset funds, including multi- dramatically. A quick glance at a global map, redrawn factor funds. to refect the size of fnancial markets, would see both Australia and New Zealand reduced to a size smaller feature as prominently as you might think. For example, than Switzerland. And some of the countries which Germany, France and Scandinavia combined would still play host to the world’s larger economies would not be dwarfed by the US. Figure 1: Country weights in MSCI ACWI index (as of 31 December 2018) Canada 2.9% Apple Sweden 1.9% 0.8% Norway Microsoft Corp Finland Russia 1.8% 0.2% UK 0.3% 0.4% Alphabet Ireland 5.2% Denmark Poland 1.6% 0.2% 0.5% Germany 0.1% Amazon 2.7% 1.5% Belgium US 0.3% Austria Netherlands Top 20 US stocks 54.4% 1.1% 0.1% 16.2% Switzerland Turkey Johnson & Johnson France 2.7% China South 0.1% 0.9% 3.4% 3.6% Korea Japan Spain Italy J.P. Morgan 1.6% 7.6% 0.8% 1.0% 0.7% Israel Qatar 0.2% 0.1% Hong India Facebook Kong 0.8% UAE 1.1% Taiwan 1.2% 1.3% Mexico 0.1% Thailand 0.3% Philip- 0.3% pines Sing- 0.3% Malaysia 0.1% apore Indo- Peru nesia 0.1% Brazil 0.3% 0.9% 0.4% South Australia Africa 2.1% 0.7% Chile New 0.1% Zealand 0.1%
Transcript of Factoring in volatility: building a defensive factor portfolio...Factoring in volatility: building a...
2019 Market Insights For Investment Professionals
An update from the Asset Allocation team
Factoring in volatility building a defensive factor portfolio Nervy investors are eyeing top-heavy market-cap indices with suspicion But how can they use factors to navigate the trade-off between diversification and concentration risk
Andrzej Pioch is a fund manager in the Multi-Asset Funds team Imagine a world where countries were physically as big His responsibilities cover the
as the size of their stock markets A handful of countries portfolio management and
would occupy most of the space The US would take up on-going development of both
nearly 60 of the Earthrsquos surface area By contrast some institutional and retail multi-
of the biggest geographical countries would shrink asset funds including multi-dramatically A quick glance at a global map redrawn factor funds to reflect the size of financial markets would see both
Australia and New Zealand reduced to a size smaller feature as prominently as you might think For example than Switzerland And some of the countries which Germany France and Scandinavia combined would still play host to the worldrsquos larger economies would not be dwarfed by the US
Figure 1 Country weights in MSCI ACWI index (as of 31 December 2018)
Canada 29
Apple Sweden19 08
NorwayMicrosoft Corp Finland Russia18 02UK 03 04
Alphabet Ireland 52 Denmark Poland16 02 05 Germany 01
Amazon 27 15 BelgiumUS 03 Austria
Netherlands Top 20 US stocks 544 11
01
162 Switzerland Turkey
Johnson amp Johnson France 27 China South0109 34 36 Korea Japan
Spain ItalyJP Morgan 16 76
08 10 07 Israel Qatar 02 01 HongIndiaFacebook Kong
08 UAE 11 Taiwan 12 13
Mexico 01 Thailand 03 Philipshy03
pines Sing- 03
Malaysia 01
apore Indo-
Peru nesia 01 Brazil 03
09
04
South AustraliaAfrica 2107Chile
New01 Zealand 01
2019 Market Insights
Figure 2 100 top contributors to SampP 500 gains H1 2018
10
Ret
urn
co
ntr
ibu
tio
n
08
06
04
02
00
Amazon Microsoft Apple Netflix and Facebook behind 90 of index return
Top stock contributors
By the same token investing in an index is supposed
to bring diversification benefits by providing exposure
to a broad market It remains a go-to option for many
lsquopassiversquo investors who are attracted by its low turnover
simplicity the absence of major rebalancing and low
fees which over last few years have only fallen But
in a global-equity market-capitalisation (lsquomarket-caprsquo)
index more than half is comprised of US companies
which happen to be the largest stocks in the world
Looking more closely at the level of concentration in
the US market-cap investors in this region have been
relying on a few names to generate outperformance
These lsquogiantsrsquo carried them through 2017 and most of
2018 mostly unscathed but they might have left them
feeling exposed in recent months as volatility returned
to the market in late 2018 Many have realised that the
underlying index is carrying significant stock-specific
risk leaving their portfolios sensitive to the news flow
generated by just a handful of companies
Dissecting the 2018 performance of the SampP 500 the
index that brings together the 500 largest US stocks
and weights them by their size reveals that the first half
of the year really belonged to the lsquobig fiversquo Amazon
Microsoft Apple Netflix and Facebook contributed 24
to an index that returned just over 26
The performance of the remaining 495 stocks was not
much more than a sideshow to what was happening
at headquarters across Silicon Valley and the outskirts
of Seattle
So when you invest in an index that is dominated by
these names you are lsquostanding on the shoulders of
giantsrsquo ndash banking on the success of a few superstar stocks
ndash which is great when those companies are growing fast
and their individual success drives the overall success
of the index
However when markets become volatile an overreliance
on several stocks leaves your portfolio vulnerable to
sharp shocks Over the long term any premium you get
from a stockrsquos individual performance is vulnerable to
market corrections and is not consistently rewarded
For illustrative purposes only Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio The above information does not constitute a recommendation to buy or sell any security
2
3
Market Insights 2019
So as some market-cap indices may become more
concentrated how can factors help investors achieve
true portfolio diversification
First off investors should consider the following
1 Do I believe there is a premium to be had from broad
exposure to equities
2 Do I agree with the conclusion that this premium is
driven by a small set of stock-level characteristics
(perhaps valuations or profitability of the underlying
issuer) rather than the market-cap (size) of individual
securities
3 Do I believe that the risk associated with individual
securities can be diversified away and as such is not
rewarded over the long term
If the answer is lsquoYesrsquo to all three then an investor may
want to structure their equity portfolio to explicitly target
the risk exposures which have historically been shown to
be rewarded and diversify away the concentration risks
which have been unrewarded ndash what factor strategies
claim to offer
RETURN OF VOLATILITY
Importantly no single factor is a panacea for every market
environment Unexpected market sell-offs tend to favour
low volatility stocks but may underperform other factors
such as momentum during a sustained market rally
Quality and low volatility factor portfolios often
draw from sectors such as utilities and staple goods
companies which produce products and services for
which demand will not be adversely affected by market
upswings or downturns These characteristics may be
augmented by strong corporate governance and lead
to a lsquobetarsquo ndash or pattern of returns in line with the broad
market ndash that is lower than the overall index diversifying
your portfolio away from index-led returns
Although historically this has meant returns may be
more consistent throughout the economic cycle they
may also be lower as earnings and valuations are not
likely to be suddenly spurred on by a boost in sales as
consumers have more spending power in their pockets
during a period of rapid economic growth
Some of the defensive factors returned some of their
outperformance from the last quarter of 2018 when the
markets rebounded in the New Year
Figure 3Two-year rolling beta to market-cap developed market equities
12
11
10
06
07
08
09
05
04 June June June June June June June June June June June June June June June 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Scientific Beta Developed Low Volatility MSCI World Minimum Volatility (USD) FTSE RAFI Developed Low Volatility
estimated on daily returns against FTSE Developed Total Returns Index in USD Past performance is not a guide to the future
4
2019 Market Insights
25
20
8
Figure 4 Relative performance versus market-cap developed market equities
0
1
2
3
4
5
6
7
shy1 Sep Oct Nov Dec Jan Feb Mar 2018 2018 2018 2018 2019 2019 2019
Scientific Beta Developed Low Volatility MSCI World Minimum Volatility (USD) FTSE RAFI Developed Low Volatility
measured against FTSE Developed Total Returns Index in USD
Hence sticking to quality and low volatility stocks
alone does not come without risks It might also lead
to investors exposing themselves to concentrated
positions in certain sectors ndash bringing back the
concentration risk they were trying to avoid in the
first place This could potentially lead to periods of
sustained underperformance When constructing longshy
term portfolios investors may wish to consider the total
picture of their investments through the cycle During
a lsquobull marketrsquo it makes sense to have some allocation
to factors which are likely to participate more fully in
the rising market More lsquocyclicalrsquo factors such as value
which could include volatile sectors like energy and
size ndash or smaller companies may cushion relative
drawdowns as higher quality stocks which exhibit a
lower beta may underperform in these markets
But would adding more factors to the mix simply dilute
returns and bring a multi-factor investorrsquos portfolio ever
closer to the broad market Allocating to a diverse pool
of factors does not necessarily mean diversifying away
the risk premium ( returns above an index the investor
is earning for taking on additional risk) as all factors
have historically outperformed global equity indices
However the outperformance comes at different points
in time during different points of the market cycle Over
a given period a multi-factor portfolio will by nature
of investing in a lsquobasketrsquo of average performance
underperform the best-performing factor However
holding a portfolio of uncorrelated factors over the
long term should provide investors with a smoother
journey through the cycle and offer the potential for
better risk-adjusted returns
Figure 5 Rolling one-year relative performance versus market-cap developed market equities
shy20
shy15
shy10
shy5
0
5
10
15
shy25 June 2003
June 2004
June 2005
June 2006
June 2007
June 2008
June 2009
June 2010
June 2011
June 2012
June 2013
June 2014
June 2015
June 2016
June 2017
June 2018
Scientific Beta Developed Low Volatility MSCI World Minimum Volatility (USD) FTSE RAFI Developed Low Volatility
measured against FTSE Developed Total Returns Index in USD
5
Market Insights 2019
Ultimately it comes down to a trade-off between
concentration risk and diversification and that is true
for factors as well as for individual stocks For investors
seeking a smoother returns profile a strategic multi-
factor portfolio may well be the answer For investors
who believe in a specific factor for a specific market
environment or are prepared to ride out bouts of
volatility in order to seek better returns from their factor
favourites a dynamic multi-factor approach or a single-
factor portfolio may suit
CONTACT US
For further information contact your usual LGIM representative or contact Stefan Jean-Luc Bilby ndash Senior Index amp
Multi-Asset Distribution Manager on
020 3124 4354 StefanBilbylgimcom lgimcom
Important Information
Legal amp General Investment Management Limited (Company Number 02091894) is registered in England and Wales and has its registered office at One Coleman Street London EC2R 5AA (ldquoLGIMrdquo)
This publication is designed for our corporate clients and for the use of professional advisers and agents of Legal amp General No responsibility can be accepted by Legal amp General Investment Management or contributors as a result of content contained in this publication Specific advice should be taken when dealing with specific situations The views expressed in here are not necessarily those of Legal amp General Investment Management and Legal amp General Investment Management may or may not have acted upon them and past performance is not a guide to future performance This document may not be used for the purposes of an offer or solicitation to anyone in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it is unlawful to make such offer or solicitation
As required under applicable laws Legal amp General will record all telephone and electronic communications and conversations with you that result or may result in the undertaking of transactions in financial instruments on your behalf Such records will be kept for a period of five years and will be provided to you upon request
LGIM is authorised and regulated by the Financial Conduct Authority
M1938 GM
2019 Market Insights
Figure 2 100 top contributors to SampP 500 gains H1 2018
10
Ret
urn
co
ntr
ibu
tio
n
08
06
04
02
00
Amazon Microsoft Apple Netflix and Facebook behind 90 of index return
Top stock contributors
By the same token investing in an index is supposed
to bring diversification benefits by providing exposure
to a broad market It remains a go-to option for many
lsquopassiversquo investors who are attracted by its low turnover
simplicity the absence of major rebalancing and low
fees which over last few years have only fallen But
in a global-equity market-capitalisation (lsquomarket-caprsquo)
index more than half is comprised of US companies
which happen to be the largest stocks in the world
Looking more closely at the level of concentration in
the US market-cap investors in this region have been
relying on a few names to generate outperformance
These lsquogiantsrsquo carried them through 2017 and most of
2018 mostly unscathed but they might have left them
feeling exposed in recent months as volatility returned
to the market in late 2018 Many have realised that the
underlying index is carrying significant stock-specific
risk leaving their portfolios sensitive to the news flow
generated by just a handful of companies
Dissecting the 2018 performance of the SampP 500 the
index that brings together the 500 largest US stocks
and weights them by their size reveals that the first half
of the year really belonged to the lsquobig fiversquo Amazon
Microsoft Apple Netflix and Facebook contributed 24
to an index that returned just over 26
The performance of the remaining 495 stocks was not
much more than a sideshow to what was happening
at headquarters across Silicon Valley and the outskirts
of Seattle
So when you invest in an index that is dominated by
these names you are lsquostanding on the shoulders of
giantsrsquo ndash banking on the success of a few superstar stocks
ndash which is great when those companies are growing fast
and their individual success drives the overall success
of the index
However when markets become volatile an overreliance
on several stocks leaves your portfolio vulnerable to
sharp shocks Over the long term any premium you get
from a stockrsquos individual performance is vulnerable to
market corrections and is not consistently rewarded
For illustrative purposes only Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio The above information does not constitute a recommendation to buy or sell any security
2
3
Market Insights 2019
So as some market-cap indices may become more
concentrated how can factors help investors achieve
true portfolio diversification
First off investors should consider the following
1 Do I believe there is a premium to be had from broad
exposure to equities
2 Do I agree with the conclusion that this premium is
driven by a small set of stock-level characteristics
(perhaps valuations or profitability of the underlying
issuer) rather than the market-cap (size) of individual
securities
3 Do I believe that the risk associated with individual
securities can be diversified away and as such is not
rewarded over the long term
If the answer is lsquoYesrsquo to all three then an investor may
want to structure their equity portfolio to explicitly target
the risk exposures which have historically been shown to
be rewarded and diversify away the concentration risks
which have been unrewarded ndash what factor strategies
claim to offer
RETURN OF VOLATILITY
Importantly no single factor is a panacea for every market
environment Unexpected market sell-offs tend to favour
low volatility stocks but may underperform other factors
such as momentum during a sustained market rally
Quality and low volatility factor portfolios often
draw from sectors such as utilities and staple goods
companies which produce products and services for
which demand will not be adversely affected by market
upswings or downturns These characteristics may be
augmented by strong corporate governance and lead
to a lsquobetarsquo ndash or pattern of returns in line with the broad
market ndash that is lower than the overall index diversifying
your portfolio away from index-led returns
Although historically this has meant returns may be
more consistent throughout the economic cycle they
may also be lower as earnings and valuations are not
likely to be suddenly spurred on by a boost in sales as
consumers have more spending power in their pockets
during a period of rapid economic growth
Some of the defensive factors returned some of their
outperformance from the last quarter of 2018 when the
markets rebounded in the New Year
Figure 3Two-year rolling beta to market-cap developed market equities
12
11
10
06
07
08
09
05
04 June June June June June June June June June June June June June June June 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Scientific Beta Developed Low Volatility MSCI World Minimum Volatility (USD) FTSE RAFI Developed Low Volatility
estimated on daily returns against FTSE Developed Total Returns Index in USD Past performance is not a guide to the future
4
2019 Market Insights
25
20
8
Figure 4 Relative performance versus market-cap developed market equities
0
1
2
3
4
5
6
7
shy1 Sep Oct Nov Dec Jan Feb Mar 2018 2018 2018 2018 2019 2019 2019
Scientific Beta Developed Low Volatility MSCI World Minimum Volatility (USD) FTSE RAFI Developed Low Volatility
measured against FTSE Developed Total Returns Index in USD
Hence sticking to quality and low volatility stocks
alone does not come without risks It might also lead
to investors exposing themselves to concentrated
positions in certain sectors ndash bringing back the
concentration risk they were trying to avoid in the
first place This could potentially lead to periods of
sustained underperformance When constructing longshy
term portfolios investors may wish to consider the total
picture of their investments through the cycle During
a lsquobull marketrsquo it makes sense to have some allocation
to factors which are likely to participate more fully in
the rising market More lsquocyclicalrsquo factors such as value
which could include volatile sectors like energy and
size ndash or smaller companies may cushion relative
drawdowns as higher quality stocks which exhibit a
lower beta may underperform in these markets
But would adding more factors to the mix simply dilute
returns and bring a multi-factor investorrsquos portfolio ever
closer to the broad market Allocating to a diverse pool
of factors does not necessarily mean diversifying away
the risk premium ( returns above an index the investor
is earning for taking on additional risk) as all factors
have historically outperformed global equity indices
However the outperformance comes at different points
in time during different points of the market cycle Over
a given period a multi-factor portfolio will by nature
of investing in a lsquobasketrsquo of average performance
underperform the best-performing factor However
holding a portfolio of uncorrelated factors over the
long term should provide investors with a smoother
journey through the cycle and offer the potential for
better risk-adjusted returns
Figure 5 Rolling one-year relative performance versus market-cap developed market equities
shy20
shy15
shy10
shy5
0
5
10
15
shy25 June 2003
June 2004
June 2005
June 2006
June 2007
June 2008
June 2009
June 2010
June 2011
June 2012
June 2013
June 2014
June 2015
June 2016
June 2017
June 2018
Scientific Beta Developed Low Volatility MSCI World Minimum Volatility (USD) FTSE RAFI Developed Low Volatility
measured against FTSE Developed Total Returns Index in USD
5
Market Insights 2019
Ultimately it comes down to a trade-off between
concentration risk and diversification and that is true
for factors as well as for individual stocks For investors
seeking a smoother returns profile a strategic multi-
factor portfolio may well be the answer For investors
who believe in a specific factor for a specific market
environment or are prepared to ride out bouts of
volatility in order to seek better returns from their factor
favourites a dynamic multi-factor approach or a single-
factor portfolio may suit
CONTACT US
For further information contact your usual LGIM representative or contact Stefan Jean-Luc Bilby ndash Senior Index amp
Multi-Asset Distribution Manager on
020 3124 4354 StefanBilbylgimcom lgimcom
Important Information
Legal amp General Investment Management Limited (Company Number 02091894) is registered in England and Wales and has its registered office at One Coleman Street London EC2R 5AA (ldquoLGIMrdquo)
This publication is designed for our corporate clients and for the use of professional advisers and agents of Legal amp General No responsibility can be accepted by Legal amp General Investment Management or contributors as a result of content contained in this publication Specific advice should be taken when dealing with specific situations The views expressed in here are not necessarily those of Legal amp General Investment Management and Legal amp General Investment Management may or may not have acted upon them and past performance is not a guide to future performance This document may not be used for the purposes of an offer or solicitation to anyone in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it is unlawful to make such offer or solicitation
As required under applicable laws Legal amp General will record all telephone and electronic communications and conversations with you that result or may result in the undertaking of transactions in financial instruments on your behalf Such records will be kept for a period of five years and will be provided to you upon request
LGIM is authorised and regulated by the Financial Conduct Authority
M1938 GM
3
Market Insights 2019
So as some market-cap indices may become more
concentrated how can factors help investors achieve
true portfolio diversification
First off investors should consider the following
1 Do I believe there is a premium to be had from broad
exposure to equities
2 Do I agree with the conclusion that this premium is
driven by a small set of stock-level characteristics
(perhaps valuations or profitability of the underlying
issuer) rather than the market-cap (size) of individual
securities
3 Do I believe that the risk associated with individual
securities can be diversified away and as such is not
rewarded over the long term
If the answer is lsquoYesrsquo to all three then an investor may
want to structure their equity portfolio to explicitly target
the risk exposures which have historically been shown to
be rewarded and diversify away the concentration risks
which have been unrewarded ndash what factor strategies
claim to offer
RETURN OF VOLATILITY
Importantly no single factor is a panacea for every market
environment Unexpected market sell-offs tend to favour
low volatility stocks but may underperform other factors
such as momentum during a sustained market rally
Quality and low volatility factor portfolios often
draw from sectors such as utilities and staple goods
companies which produce products and services for
which demand will not be adversely affected by market
upswings or downturns These characteristics may be
augmented by strong corporate governance and lead
to a lsquobetarsquo ndash or pattern of returns in line with the broad
market ndash that is lower than the overall index diversifying
your portfolio away from index-led returns
Although historically this has meant returns may be
more consistent throughout the economic cycle they
may also be lower as earnings and valuations are not
likely to be suddenly spurred on by a boost in sales as
consumers have more spending power in their pockets
during a period of rapid economic growth
Some of the defensive factors returned some of their
outperformance from the last quarter of 2018 when the
markets rebounded in the New Year
Figure 3Two-year rolling beta to market-cap developed market equities
12
11
10
06
07
08
09
05
04 June June June June June June June June June June June June June June June 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Scientific Beta Developed Low Volatility MSCI World Minimum Volatility (USD) FTSE RAFI Developed Low Volatility
estimated on daily returns against FTSE Developed Total Returns Index in USD Past performance is not a guide to the future
4
2019 Market Insights
25
20
8
Figure 4 Relative performance versus market-cap developed market equities
0
1
2
3
4
5
6
7
shy1 Sep Oct Nov Dec Jan Feb Mar 2018 2018 2018 2018 2019 2019 2019
Scientific Beta Developed Low Volatility MSCI World Minimum Volatility (USD) FTSE RAFI Developed Low Volatility
measured against FTSE Developed Total Returns Index in USD
Hence sticking to quality and low volatility stocks
alone does not come without risks It might also lead
to investors exposing themselves to concentrated
positions in certain sectors ndash bringing back the
concentration risk they were trying to avoid in the
first place This could potentially lead to periods of
sustained underperformance When constructing longshy
term portfolios investors may wish to consider the total
picture of their investments through the cycle During
a lsquobull marketrsquo it makes sense to have some allocation
to factors which are likely to participate more fully in
the rising market More lsquocyclicalrsquo factors such as value
which could include volatile sectors like energy and
size ndash or smaller companies may cushion relative
drawdowns as higher quality stocks which exhibit a
lower beta may underperform in these markets
But would adding more factors to the mix simply dilute
returns and bring a multi-factor investorrsquos portfolio ever
closer to the broad market Allocating to a diverse pool
of factors does not necessarily mean diversifying away
the risk premium ( returns above an index the investor
is earning for taking on additional risk) as all factors
have historically outperformed global equity indices
However the outperformance comes at different points
in time during different points of the market cycle Over
a given period a multi-factor portfolio will by nature
of investing in a lsquobasketrsquo of average performance
underperform the best-performing factor However
holding a portfolio of uncorrelated factors over the
long term should provide investors with a smoother
journey through the cycle and offer the potential for
better risk-adjusted returns
Figure 5 Rolling one-year relative performance versus market-cap developed market equities
shy20
shy15
shy10
shy5
0
5
10
15
shy25 June 2003
June 2004
June 2005
June 2006
June 2007
June 2008
June 2009
June 2010
June 2011
June 2012
June 2013
June 2014
June 2015
June 2016
June 2017
June 2018
Scientific Beta Developed Low Volatility MSCI World Minimum Volatility (USD) FTSE RAFI Developed Low Volatility
measured against FTSE Developed Total Returns Index in USD
5
Market Insights 2019
Ultimately it comes down to a trade-off between
concentration risk and diversification and that is true
for factors as well as for individual stocks For investors
seeking a smoother returns profile a strategic multi-
factor portfolio may well be the answer For investors
who believe in a specific factor for a specific market
environment or are prepared to ride out bouts of
volatility in order to seek better returns from their factor
favourites a dynamic multi-factor approach or a single-
factor portfolio may suit
CONTACT US
For further information contact your usual LGIM representative or contact Stefan Jean-Luc Bilby ndash Senior Index amp
Multi-Asset Distribution Manager on
020 3124 4354 StefanBilbylgimcom lgimcom
Important Information
Legal amp General Investment Management Limited (Company Number 02091894) is registered in England and Wales and has its registered office at One Coleman Street London EC2R 5AA (ldquoLGIMrdquo)
This publication is designed for our corporate clients and for the use of professional advisers and agents of Legal amp General No responsibility can be accepted by Legal amp General Investment Management or contributors as a result of content contained in this publication Specific advice should be taken when dealing with specific situations The views expressed in here are not necessarily those of Legal amp General Investment Management and Legal amp General Investment Management may or may not have acted upon them and past performance is not a guide to future performance This document may not be used for the purposes of an offer or solicitation to anyone in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it is unlawful to make such offer or solicitation
As required under applicable laws Legal amp General will record all telephone and electronic communications and conversations with you that result or may result in the undertaking of transactions in financial instruments on your behalf Such records will be kept for a period of five years and will be provided to you upon request
LGIM is authorised and regulated by the Financial Conduct Authority
M1938 GM
4
2019 Market Insights
25
20
8
Figure 4 Relative performance versus market-cap developed market equities
0
1
2
3
4
5
6
7
shy1 Sep Oct Nov Dec Jan Feb Mar 2018 2018 2018 2018 2019 2019 2019
Scientific Beta Developed Low Volatility MSCI World Minimum Volatility (USD) FTSE RAFI Developed Low Volatility
measured against FTSE Developed Total Returns Index in USD
Hence sticking to quality and low volatility stocks
alone does not come without risks It might also lead
to investors exposing themselves to concentrated
positions in certain sectors ndash bringing back the
concentration risk they were trying to avoid in the
first place This could potentially lead to periods of
sustained underperformance When constructing longshy
term portfolios investors may wish to consider the total
picture of their investments through the cycle During
a lsquobull marketrsquo it makes sense to have some allocation
to factors which are likely to participate more fully in
the rising market More lsquocyclicalrsquo factors such as value
which could include volatile sectors like energy and
size ndash or smaller companies may cushion relative
drawdowns as higher quality stocks which exhibit a
lower beta may underperform in these markets
But would adding more factors to the mix simply dilute
returns and bring a multi-factor investorrsquos portfolio ever
closer to the broad market Allocating to a diverse pool
of factors does not necessarily mean diversifying away
the risk premium ( returns above an index the investor
is earning for taking on additional risk) as all factors
have historically outperformed global equity indices
However the outperformance comes at different points
in time during different points of the market cycle Over
a given period a multi-factor portfolio will by nature
of investing in a lsquobasketrsquo of average performance
underperform the best-performing factor However
holding a portfolio of uncorrelated factors over the
long term should provide investors with a smoother
journey through the cycle and offer the potential for
better risk-adjusted returns
Figure 5 Rolling one-year relative performance versus market-cap developed market equities
shy20
shy15
shy10
shy5
0
5
10
15
shy25 June 2003
June 2004
June 2005
June 2006
June 2007
June 2008
June 2009
June 2010
June 2011
June 2012
June 2013
June 2014
June 2015
June 2016
June 2017
June 2018
Scientific Beta Developed Low Volatility MSCI World Minimum Volatility (USD) FTSE RAFI Developed Low Volatility
measured against FTSE Developed Total Returns Index in USD
5
Market Insights 2019
Ultimately it comes down to a trade-off between
concentration risk and diversification and that is true
for factors as well as for individual stocks For investors
seeking a smoother returns profile a strategic multi-
factor portfolio may well be the answer For investors
who believe in a specific factor for a specific market
environment or are prepared to ride out bouts of
volatility in order to seek better returns from their factor
favourites a dynamic multi-factor approach or a single-
factor portfolio may suit
CONTACT US
For further information contact your usual LGIM representative or contact Stefan Jean-Luc Bilby ndash Senior Index amp
Multi-Asset Distribution Manager on
020 3124 4354 StefanBilbylgimcom lgimcom
Important Information
Legal amp General Investment Management Limited (Company Number 02091894) is registered in England and Wales and has its registered office at One Coleman Street London EC2R 5AA (ldquoLGIMrdquo)
This publication is designed for our corporate clients and for the use of professional advisers and agents of Legal amp General No responsibility can be accepted by Legal amp General Investment Management or contributors as a result of content contained in this publication Specific advice should be taken when dealing with specific situations The views expressed in here are not necessarily those of Legal amp General Investment Management and Legal amp General Investment Management may or may not have acted upon them and past performance is not a guide to future performance This document may not be used for the purposes of an offer or solicitation to anyone in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it is unlawful to make such offer or solicitation
As required under applicable laws Legal amp General will record all telephone and electronic communications and conversations with you that result or may result in the undertaking of transactions in financial instruments on your behalf Such records will be kept for a period of five years and will be provided to you upon request
LGIM is authorised and regulated by the Financial Conduct Authority
M1938 GM
5
Market Insights 2019
Ultimately it comes down to a trade-off between
concentration risk and diversification and that is true
for factors as well as for individual stocks For investors
seeking a smoother returns profile a strategic multi-
factor portfolio may well be the answer For investors
who believe in a specific factor for a specific market
environment or are prepared to ride out bouts of
volatility in order to seek better returns from their factor
favourites a dynamic multi-factor approach or a single-
factor portfolio may suit
CONTACT US
For further information contact your usual LGIM representative or contact Stefan Jean-Luc Bilby ndash Senior Index amp
Multi-Asset Distribution Manager on
020 3124 4354 StefanBilbylgimcom lgimcom
Important Information
Legal amp General Investment Management Limited (Company Number 02091894) is registered in England and Wales and has its registered office at One Coleman Street London EC2R 5AA (ldquoLGIMrdquo)
This publication is designed for our corporate clients and for the use of professional advisers and agents of Legal amp General No responsibility can be accepted by Legal amp General Investment Management or contributors as a result of content contained in this publication Specific advice should be taken when dealing with specific situations The views expressed in here are not necessarily those of Legal amp General Investment Management and Legal amp General Investment Management may or may not have acted upon them and past performance is not a guide to future performance This document may not be used for the purposes of an offer or solicitation to anyone in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it is unlawful to make such offer or solicitation
As required under applicable laws Legal amp General will record all telephone and electronic communications and conversations with you that result or may result in the undertaking of transactions in financial instruments on your behalf Such records will be kept for a period of five years and will be provided to you upon request
LGIM is authorised and regulated by the Financial Conduct Authority
M1938 GM
