As investors, we seek to build diversified equity exposure with the objective of achieving higher returns with lower risk profiles and better diversification than broad equity markets.
What are Factors?
“There is no free lunch attached to factor investing.”
- The factor is grounded in academic literature and vetted through the scientific method over decades;
- The factor is robust across definitions and geographies;
- The factor has a credible, economic rationale to offer a persistent risk-adjusted return premium.
The six common consensual factors that decades of research have shown to have the potential to deliver excess returns are:
- Value
- Low Volatility
- High Momentum
- Low Investment
- High Profitability
- Market Cap Size
“Diversification across factors has historically reduced the length of periods of underperformance by any one individual factor.”
Value
Book-to-Market Ratio
High Momentum
Cumulative Return Over Last 12 Months excluding Last Month
High Profitability
Past Year Gross Profit / Total Assets
Low Volatility
Weekly Volatility Over the Past 2 Years
Low Investment
Growth of Total Assets Over Past 2 Years
Size
Free-Float Adjusted Market Cap
| Factor | Historical Risk | Historical Correlation | Historical Business Cycle |
|---|---|---|---|
| Value | Comparable to market | Low with Momentum and Quality | Pro-cyclical |
| Momentum | Comparable to market | Low with Value, Yield and Quality | Pro-cyclical |
| Low Size | Comparable to market | Low with Min Volatility, Yield and Quality | Pro-cyclical |
| High Profitability | Comparable to market | Low with Value, Size, Yield and Momentum | Defensive |
| Low Investment | Comparable to market | Low with Value, Size, Yield and Momentum | Defensive |
| Low Volatility | Comparable to market | Low with Value and Momentum | Defensive |
Source: Counsel Portfolios
There is no free lunch associated with factor investing. While factor indices have exhibited excess risk-adjusted returns over longer periods, over shorter horizons factors exhibit cyclicality, including periods of underperformance.
Diversification across factors has historically reduced the length of periods of underperformance by any one individual factor. This is no different from the diversification investors get in their portfolios from different asset classes or geographic regions.
Utilizing Multi-Factor Strategies
When we combine the multi-factor strategies with our style-based managers, what we’ve seen since November 2019 when we introduced the strategies is the following:
- Across all geographies, composite performance has resulted in superior risk-adjusted performance with a lower standard deviation of returns
- The performance and risk that we have seen are consistent with the back-tested performance
- The results continue to deliver a portfolio with enhanced risk characteristics and increased exposure to long-term reward factors.
- The portfolios have a more balanced risk factor exposure and a greater diversification of those exposures. This is far and above what could be achieved through diversification across traditional active strategies.
Conclusion
Our current research indicates that we can obtain a higher long-term return compared to a market cap-weight index from investment strategies that tilt toward these six most rewarded factors. Second, we're getting more effective diversification with these strategies as we're no longer reliant on a single strategy to drive performance in any one market environment. Lastly, employing the multi-factor strategies enhances the risk-adjusted performance of the portfolios as we're also ensuring that our exposure to unrewarded risks is lessened. All in all, the addition of the multi-factor strategies improves the resilience of our Counsel Strategic portfolios, improving the probability of success for these investment solutions going forward.
Corrado Tiralongo
Vice President, Asset Allocation & Chief Investment Officer
Canada Life Investment Management
Disclaimers:
The views expressed in this commentary are those of Canada Life Investment Management as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their advisor for advice based on their specific circumstances. The content of this material (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.
This material may contain forward-looking information that reflects our or third-party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as ofMarch 2, 2023. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise. Investment Planning Counsel Inc. is a fully integrated wealth management company. Counsel Portfolios are a family of funds managed by Canada Life Investment Management Ltd., a subsidiary of the Canada Life Assurance Company. Trademarks owned by Investment Planning Counsel Inc. and licensed to its subsidiary corporations. Mutual funds available through IPC Investment Corporation and IPC Securities Corporation.
