Portfolio Construction - Factor-based investing

September 26, 2018 • Portfolio Construction

By: Marchello Holditch, CFA
Vice-President, Multi-Asset Management

If you pass white light through a prism, the light separates and you can see that white light is made up of many different colours. I like to picture rock band Pink Floyd’s album cover for The Dark Side of the Moon. Now, think about your portfolio as white light. 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.

Factors are one of the underlying drivers of portfolio returns. For example, a portfolio with stocks that exhibit positive momentum in earnings and price is exposed to the momentum factor. Portfolios with stocks that have low price-to-earnings ratios are exposed to the value factor. A large range of other factors have also been analyzed and debated in academic literature. Factor-based investing simply means considering factor exposures when constructing portfolios.

Today, exchange-traded funds (ETFs) can be effective tools to gain exposure to different factors. To meet changing investor needs, ETFs have evolved from their original purpose of replicating the performance of a market capitalization-weighted index to factor-based ETFs that seek to replicate the performance of various factor-weighted indexes. Well-known market capitalization-based indexes, such as the S&P 500 Index, are weighted according to size. This means they are concentrated in large established companies. Low-risk weighted indexes such as the MSCI World Risk Weighted Top 200 Index, an example of a factor product, are weighted according to risk, so larger weightings are given to lower-risk stocks. This approach may include high-volatility stocks found within the index, but these holdings have lower weightings. The result is lower volatility than the market capitalization weighted-index.

While they can increase risk if used improperly, factor-based ETFs can be highly useful investment tools for multi-asset portfolio managers when used within a robust asset allocation framework. They can help to enhance precision and efficiency in asset allocation as well as address overweightings or underweightings to certain portfolio exposures. They can also expand the portfolio’s risk management tool kit. We expect to utilize factor-based ETFs selectively going forward as we continually seek to enhance returns, manage risk, and improve efficiencies.

Multi-Asset Management remains committed to actively managing all the variables that affect an investor’s total return, including factor exposures.





This document is intended solely for information purposes. It is not a sales prospectus, nor should it be construed as an offer or an invitation to take part in an offer. This report may contain forward-looking statements about one or more funds, future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. United pools are managed by CI Investments Inc. Assante Wealth Management is a subsidiary of CI Investments Inc. Neither CI Investments Inc. nor its affiliates or their respective officers, directors, employees or advisors are responsible in any way for damages or losses of any kind whatsoever in respect of the use of this report. Commissions, trailing commissions, management fees and expenses may all be associated with investments in mutual funds and the use of the Asset Management Service. Any performance data shown assumes reinvestment of all distributions or dividends and does not take into account sales, redemption or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the fund prospectus and consult your advisor before investing. Assante Wealth Management and the Assante Wealth Management design are trademarks of CI Investments Inc. This report may not be reproduced, in whole or in part, in any manner whatsoever, without prior written permission of Assante Wealth Management. Copyright © 2018 Assante Wealth Management (Canada) Ltd. All rights reserved.

« back to Newsletter page