The Markets April 7, 2016

Factor Investing on the Rise in Past Three Years

Factor investing, based on the idea that risks and returns of investments can be attributed to a common set of economic and style factors, has become popular among institutional investors.
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Institutional investors have taken an interest in factor investing, according to a study conducted by The Economist Intelligence Unit and sponsored by BlackRock.

Factor investing is supported by years of academic research and is based on the premise that the risks and returns of all investments can be mapped to a common set of factors. Survey respondents believe macro-economic factors such as economic growth, inflation and interest rates, as well as style factors such as value, quality, momentum and volatility, can help them deliver long-term outperformance, decrease overall portfolio risk, increase transparency in portfolio construction, and better understand past and future drivers of return. This strategy has become increasingly popular as a result of the financial crisis, when asset owners wanted to seek deeper insights into risks and returns, diversification and more efficient investment strategies, according to BlackRock’s report.

The survey found that more than 85% of respondents use factors in their investment process, and almost two-thirds of the institutions surveyed said they have increased their usage of factors over the past three years. The trend is expected to continue, with 60% of respondents indicating they plan to increase their use of factors over the next three years. When asked about their motivation for using factor investing, the most popular response was to better understand risk and return (76%). The same percentage said they had achieved this goal. More than half (59%) have achieved greater diversification, 56% have lowered risk and 55% have increased returns.

“As is often the case, adversity has given rise to innovation. The unexpected correlations of asset performance during the financial crisis spurred investors to better understand underlying risks,” says Mark McCombe, global head of BlackRock’s Institutional Client Business. “This has resulted in a growing interest in factor strategies. Following an initial focus on risk management, investors increasingly believe that factor strategies can drive enhanced performance.”

NEXT: The Most Commonly Used FactorsBlackRock's report also points out that the investment industry as a whole is yet to settle on a common definition for the term “factor,” and the type of factors used depends on the asset owners. Some investors, for example, may focus on macro factors such as economic growth while others cite inflation.

Macro and style factors are used in both risk management and investment strategies. More than half (53%) of the institutions surveyed use investment strategies targeting one or more factors—value is the most commonly targeted style factor, and inflation is the most commonly used macro factor. Equity factor strategies (e.g., smart beta) are used by 68% of investors, but more advanced long/short multi-asset strategies are also widely used (by 57% of those who invest in factors).

The idea of factors is to distill investments down into something very simple, as Ked Hogan, head of investments for BlackRock’s Factor-Based Strategies Group, points out. Implementing factor investing is more complicated, however. Investors must decide how to fund an allocation to factor-based strategies and where they believe these strategies should be in their portfolios, he adds.

Institutions are taking several steps to prepare for future factor use. More than two-thirds of those increasing factor use over the next three years will ensure they have appropriate risk management systems. More than half expect to seek advice from asset managers, and 37% expect to hire more staff. Half of those increasing factor use say they will make an initial allocation to an investment strategy to monitor performance.

“Having worked with several of the early adopters, seeing the increasing acceptance of factors by institutional investors is particularly gratifying,” says Andrew Ang, head of Factor-Based Investing Strategies at BlackRock. “The research echoes my experiences with clients. The broad and growing number of institutional investors adopting factor-based investing reflects the benefits and versatility of the approach. Those reasons are why we are so confident in the outlook for factor investing.”

The global survey was conducted among 200 institutional investors representing $5.5 trillion in assets under management.

Products April 7, 2016

Investment Product and Service Launches

LMCG Investments adds to small-cap offerings; Voya Financial expands access to its target-date mutual fund series; Fringe Benefits Design partners with Redhawk Wealth Advisors for ERISA fiduciary services. 
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LMCG Launches Small Cap Fund

LMCG Investments announced the launch of the LMCG International Small Cap Fund.

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According to the firm, the fund allows financial advisers and investors to access LMCG’s international small cap strategy through a no-load mutual fund.  The fund seeks long-term capital appreciation, “adding value versus the MSCI EAFE Small Cap Index using a bottom-up quantitative approach to investing.” 

“International small caps can offer important diversification benefits as part of an equity allocation, but investors often overlook this asset class or have limited access to it,” explains Kenneth Swan, chief executive officer of LMCG.  “We believe that experienced active management can add value in this area and that a quantitative approach is the most efficient way to sort through the large universe of international small-cap stocks.”

The fund was previously available as a collective trust fund, available only to large institutional investors, but LMCG believes that mutual fund structure will appeal to financial advisers and their clients, “given the limited number of competitor funds and LMCG’s experience in this asset class.”

The fund is managed by Gordon Johnson, portfolio manager with more than 23 years of experience managing global portfolios and developing quantitative investment models. Shannon Ericson is co-portfolio manager, and Daniel Getler is portfolio analyst. The team “seeks international small-cap stocks with attractive valuations that also have good growth prospects and high quality earnings.”

The firm further explains the fund can serve as part of an equity allocation in a portfolio that seeks to diverse sources of return. “Additionally, the strong U.S. dollar has been a headwind for non-U.S. dollar-based assets since 2011. For investors who believe the US dollar will weaken, this fund can provide important non-U.S. dollar exposure.”

More information is at www.lmcgfunds.com.

NEXT: Voya Grows TDF Lineup 

Voya Grows TDF Lineup

Voya Investment Management has expanded access to its target-date mutual fund series, the Target Retirement Funds. 

According to Voya, the funds have been added to several new defined contribution platforms including Paychex, ADP and Ascensus. Voya has also launched two new share classes, A and R6, due to high demand from retirement plans.

“As a pioneer in target-date solutions, with over a decade of experience and over $11 billion in target-date assets, we are proud to fulfill an industry need and enhance our offerings in the DCIO space,” says Jake Tuzza, head of Voya Intermediary Distribution. “In our most recent 'Participant Preferences' survey, we found that target-date investors value a multi-manager structure, allowing for a more diverse array of asset classes and investment managers, as well as a reduction in single manager risk.”

Voya says the Target Retirement Funds provide investors with a number of features including an intelligent blend of both active and passive strategies; a participant-centric "to" glide path that emphasizes an aggressive investment approach early in a participant's career and a more conservative approach closer to retirement, relative to peers; and broad diversification of traditional and non-traditional asset classes.

More information about Voya's target-date survey can be found here.

NEXT: Fringe Benefits Teams with Redhawk

Fringe Benefits Teams with Redhawk

Registered investment adviser (RIA) Redhawk Wealth Advisors is teaming up with Fringe Benefits Design to serve as an independent Employee Retirement Income Security Act (ERISA) investment fiduciary.

In this capacity, Redhawk will utilize the E-Valuator application to provide ERISA 3(38) investment management and 3(21) investment adviser services, starting with a base of over 400 plans representing $750 million in plan assets. Redhawk will be responsible for performing the due diligence, selection, monitoring and replacement of investments for the plans, the firms explain.

The firms explain the service will help ERISA investment fiduciaries manage their responsibility to prudently select and monitor plan investments, especially the qualified default investment alternative (QDIA).  

“We conducted comprehensive due diligence on the top investment fiduciaries and were extremely impressed with the fiduciary services provided by Redhawk,” says Kevin Miller, president and CEO of Fringe Benefits Design. “In light of the new DOL fiduciary rule, we felt that it was important for all of our plans to have this fiduciary oversight.”

Rick Keast, president of Redhawk Wealth Advisors, says the new partnership is another win for the firm’s E-Valuator tool, which can help advisers figure out how to manage and mitigate fiduciary liability in their plans, portfolios and practices. 

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