Factor Investing

Factor Indexes and Investing

Steven Kowal, CFA

Moderator Executive Director Index Business Head of Wealth Advisory Channel Management EMA & India MSCI

What is Factor Investing

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A large body of academic research highlights that long-term equity portfolio performance can be explained by systematic factors Some factors represent exposure to systematic risk and have historically earned a long-term risk premium Factor investing is the investment process that harvests risk premia through exposure to factors MSCI currently identifies six risk premia factors - each of which have solid explanations as to why they have provided a premium

6 KEY FACTORS

Low Size Value

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Momentum

Quality

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Yield

Low Volatility

What Attracts Investors to Factor Investing?

*Based on official Index Levels from May 1988; Low Volatility Tilt Index prior to that

What Causes Risk Premia?

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There are two main views on why these excess returns exist, which result from different perspectives on market efficiency: 1. Systematic Risks Certain stocks are highly correlated with the economic cycle and earn a risk premium 2. Systematic Errors Certain stocks may be systematically under priced and subsequently earn a high return

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The important question for long term investors considering an allocation to risk premia strategies is not only which theory explains them but whether they are likely to persist Both theories attempting to explain historical return regularities may allow for risk premia to persist, provided that the same historical behavior persists in the future

Cyclicality is a Key Dimension

*Based on official Index Levels from May 1988; Low Volatility Tilt Index prior to that

Deploying Multi-Factor Indexes

Global Equity Beta Added Value Passive Investing Factor Investing Active Management Benchmark Indices Multi-Factor Index Active Mandates

Strategic Factor Tilts

Momentum

Value

Tactical Factor Tilts & Overlay...