Unigestion has been managing equity portfolios using a risk-focused approach since 1997. The combination of our risk-managed equity expertise and our experience in multi-factor monitoring led to the launch of a multi-factor equity strategy, first within a broader multi-asset strategy in 2014, and then as a standalone strategy in 2015. We currently have in excess of USD 400 million under management across both pooled funds and segregated mandates (as at 31.12.2018).
What is factor investing?
Factor investing involves targeting quantifiable, firm characteristics (factors) that can explain differences in stock returns. Decades of academic research have identified hundreds of factors that impact stock returns, including size, value, momentum, asset growth, profitability and leverage.
A factor-based investment approach involves tilting an equity portfolio toward and away from specific factors in an attempt to generate long-term investment returns in excess of benchmarks.
At Unigestion, our multi-factor equity strategy is global and is built with a diversification constraint in order to reconcile the effectiveness of factor returns within a disciplined risk management framework. It uses an innovative investment approach, which adds value through dynamic allocation to five equity risk premia:
- Low risk
Equity risk premia are enhanced by a dynamic risk-based factor weighting scheme, which is based on proprietary macro and style indicators. The strategy has been expanded to include both long-only and long-short versions, as standalone products and within multi asset strategies. Within our process, we combine proprietary systematic (quantitative) and discretionary (qualitative) portfolio construction techniques to deliver better-informed investment decisions.
The starting point of our investment process is to take an integrated and bottom-up approach to our factor framework. The rationale is that this approach is well aligned with our risk management philosophy, greatly simplifies and reduces operational risk and yields statistically superior returns – as proven by our robust backtest analysis.
Three steps to investment success
1. Factor definition
We have selected the five equity factors for which we believe that there is an economic rationale. They are academically documented, investable and consistent across geographies. They also demonstrate a desirable risk/return profile based on our extensive backtest simulations. In addition, we use enhanced definitions for each factor, resulting in deeper and more meaningful analysis. Furthermore, given the key reason for investing in a multi-factor strategy over a single-factor strategy is for diversification, the chosen factors typically display decorrelation properties from one another, resulting in a more robust multi-factor portfolio.
Factor scores are computed from a range of financial ratio indicators and then transformed in to Z-scores to normalise and detect and/or exclude outliers over three standard deviations. Grouping is typically applied on a region and/or sector neutral basis.
ENHANCED FACTOR DEFINITION
|Factor||Industry’s usual definition||Unigestion’s enhanced edfinition|
|Value||Price/Book, Price/Earnings||Dividend yield, EV/EBITDA, Price/Book, Price/Earnings, Price/Sales, Price/FFO
(ratios are sector dependent)
|Momentum||1-year return||1-year total return adjusted for both short-term reversal and volatility|
|Quality||ROE||Profitability, Balance Sheet Quality and Safety|
|Size||Market capitalization||Market capitalization, Enterprise Value and Total Assets|
|Low Risk||Volatility||Ex-ante volatility estimated using proprietary risk model|
2. Factor integration
Once factor scores are calculated, we take into account other characteristics and dynamically allocate across each factor. At this stage, we consider both style characteristics, such as volatility and correlations, as well as macro regimes, where we introduce the sensitivity factors have to steady growth and recession macro regimes.
The signals provided here are based on our proprietary “Nowcasting” economic signals. For example, the invested portfolio tends to be overweight quality and low risk and underweight momentum during recessionary periods relative to steady growth environment. The risk-based dynamic component of our process also provides the ability to manage the overall portfolio to a more defensive stance (lower beta target) during periods of recession.
3. Robust factor portfolio construction
A unique element of our factor offering is our ability to provide qualitative risk management utilising our tried and tested proprietary 360-degree risk management methodology. At this stage, we analyse a broad spectrum of qualitative, financial and extra-financial, risk indicators. In our opinion, building factors without the requirement of risk efficiency means that a factor investment will carry unrewarded and unintended risks. We believe such risks lead to certain factor portfolios being highly correlated and possibly suffering larger drawdowns. Therefore, our overarching aim is to identify the unrewarded risks that are not reflected in stock prices and avoid them.
Factor integration provides a natural mechanism to exclude securities with extremely poor scores in one or many factors, as they are then unlikely to score highly on the aggregate final score. This bodes well with Unigestion’s active risk management DNA of aiming to reduce unrewarded risks and to construct risk-efficient portfolios with asymmetrical performance behaviour.
Our investment edge:
- 1. Enhanced factor definitions
- 2. Implementation of Unigestion’s risk managed approach
- 3. Systematic dynamic allocation across factors
|Guidelines||Active Factor Allocation Portfolio|
|Holding limits||2% maximum and 40bps minimum per position|
|Sector limits||Maximum relative +/-10% in any sector (GICS classification)|
|Currency limits||Maximum relative +/-5% in any currency|
|Cash||Portfolio fully invested in equities (typical level of cash 0.5%)|
|Liquidity criteria||Average daily volume of each position is controlled by a proprietary liquidity screen. The maximum weight of each stock is a function of its underlying liquidity.|
What do we screen on?
- Balance sheet and earnings: Aims to select stocks with solid balance sheets and stable earnings
- Valuation: Aims to select stocks with a reasonable valuation, both relative to the sector and on an absolute basis
- Visibility: Aims to select stocks that have not been impacted by events such as M&A activity, change of business model, legal events, etc.
- Liquidity: Aims to select stocks with good daily liquidity and sufficient market depth
- Price stability and diversification: Aims to select stocks with either a stable price (i.e. lower volatility) or diversification potential (i.e. lower correlation to other stocks)
Through our Unigestion wide Macro Committee, we also examine a range of broad macroeconomic trends and assign them a score based upon three different dimensions:
- potential impact
- priced into the market
Factor strategy performance
Based on the extensive research we have completed on our performance history, the reasons for outperformance and underperformance are intrinsically connected to market context and are in line with the portfolio risk profile and expected behaviour.
- Outperformance in bear markets:
As a result of lower beta relative to the market and its highly diversified nature, our enhanced factor equity strategy has outperformed indices in down markets.
- Outperformance during range-trading markets:
Our strategy is designed to participate more on the upside than on the downside of market returns. We refer to this as asymmetry. This asymmetry is the result of a systematic active bias to Equity Risk Premia combined into a well-diversified portfolio with a lower beta relative to the market, so there is good participation when the market advances. Therefore, it has built performance over range-trading markets.
- Reasonable performance during broad bull markets:
Our strategy has performed reasonably well in broad bull markets when there was sufficient underlying volatility from which to benefit, thanks to its asymmetrical performance behaviour.
- Performance lag during thematic rallies:
Given the well diversified nature of the strategy, it has underperformed in thematic markets, especially when positive performance was not spread across the market, but concentrated in a few sectors or very factor specific.