The “Smart Beta” investment

investment-2400559_960_720

Classic diversification was before

Current management highlights the disappearance of the concept of diversification from the modern portfolio theory developed by Markowitz in the 1950s.

The Markowitz model aims to build a portfolio containing low correlation assets that are mainly risky assets, on the one hand, such as equities and non risky assets, on the other hand, such as bonds. The combination of these two asset classes makes it possible to minimize the risk to which a portfolio is exposed for a given return. This portfolio is usually referred to as the efficient portfolio. With equity risk predominating, managers have shifted to other types of management.

Subsequently, the second generation of management saw the introduction of new asset classes in the managers’ portfolios in order to reduce this equity risk. The funds exposed to this strategy have finally been impacted in the same way as equities by various crises such as the internet bubble, subprimes or the sovereign debt crisis, to mention only the most recent ones. The asset classes included in the portfolios for diversification purposes are positively correlated with equities.

Factor investment “premium” now

After an interview with a member of a management company to learn more about this strategy, I was able to learn more about these long/short portfolios, which represent the present of institutional portfolio management. Gone is the diversification between equities and bonds, which tend to correlate in periods of high risk aversion, assets such as equities are now broken down into factors (Figure 1).

Figure 1: The factors used

Factors Description
Market Return on equities above the risk-free rate.
Value Return on overvalued equities compared to undervalued equities.
Momentum Equities that have performed in the more or less recent past tend to perform better than others.
Volatility Preference for low volatility stocks that have historically outperformed.
Size Small businesses outperform large ones in terms of performance.

 

The new generation of managers therefore considers these factors in order to optimize their return instead of traditional assets.

Based on these factors, it is possible to build the long/short portfolios mentioned above in order to benefit from the premiums from each factor (Figure 2).

Facteur value

  • L’idée est que la prime de valeur est obtenue en étant long des actions sous-évaluées (rapport entre le dernier prix de l’action et son prix moyen à long terme) et short des actions surévaluées. Partant du principe que les prix des actions devraient converger vers leur prix moyen, ce principe d’arbitrage permet de se couvrir en période de crise même si le risque reste présent.

Facteur momentum

  • La prime momentum est la plus intuitive puisqu’elle consiste à acheter les actions qui ont performé dans un passé plus ou moins proche, généralement 1 an et, à l’inverse, vendre  celles qui ont sous-performé en comparaison à un ensemble d’actions.

Facteur volatilité

  • La volatilité est une mesure importante du risque. Elle est calculée à partir de l’écart-type des rendements des actions en portefeuille. Plus le rendement espéré d’un portefeuille est important, plus le risque qui en découle, matérialisé par la volatilité, sera important. La prime de volatilité provient par conséquent de l’achat des actions à plus faible volatilité et la vente des actions à forte volatilité.

Facteur taille

  • Historiquement, les petites capitalisations surperforment les grandes capitalisations puisque les premières peuvent être comparées à des valeurs de croissance tandis que les secondes à des valeurs de rendement. L’achat des petites capitalisations couplé à la vente des grandes capitalisations perme
  • t par conséquent d’obtenir une prime qui est appelée prime de taille.

La liste des facteurs présentés précédemment est une liste non-exhaustive. Il existe d’autres facteurs qui ne seront pas abordés dans cette article tels qu’entres autres les facteurs de croissance, de qualité et de dividende.

Une stratégie d’arbitrage factoriel

Revue banque
Source : Revue Banque, Septembre 2016

Une fois les stratégies mises en place, le rôle de l’asset manager (AM) est de déterminer quels sont les actions à vendre ou à acheter. Dans le cas du facteur value, l’AM doit déterminer quels sont les actifs sous-évalués (respectivement surévalués) qu’il achètera (vendra).

En règle générale, l’AM effectue un classement des actifs présents dans un certain univers (Figure3). Prenons l’exemple d’un fond ayant pour benchmark le CAC40, l’univers représentera l’ensemble des 40 actions composant l’indice français. Le gérant choisira ensuite les N valeurs les mieux classées et les N valeurs les moins bien classées afin de constituer son portefeuille. Le choix du N varie en fonction des fonds prenant en compte le risque auquel ceux-ci acceptent de s’exposer.

Figure 3 : Constitution d’un portefeuille

Portfolio building
Source : Bank Review, September 2016

And the risk would you tell me?

The risk of a smart Beta strategy can be measured using 3 indicators:

  • Exposure to securities factors
  • Covariances between factors
  • Covariances between securities

Finally, the variance of the portfolio must be calculated as for traditional active management, except that exposure factors are now taken into account.

Either:

X =

F=<

Covariance

The covariance variance matrix covariance of factor returns.

Portfolio variance:

Portfolio variance

With

vector of the weights of the active N weights

Δ = vector of the specific risks of the assets

Factor investment, a “smart” investment

The strengths of the “smart beta” are therefore multiple. Despite a risk that persists and will never disappear in its entirety, it can be mitigated. The portfolio arbitrage strategy long/short allows you to hedge or at least mitigate the risk of loss in the event of high volatility or crisis. Historically, funds whose strategy is factorial investment tend to weather crises with less significant losses than funds managed “traditionally”.

It remains to be seen whether, like many investment strategies, the “smart beta” will remain only a temporary fashion or whether it will persist over time.

  • ” The pitfalls of traditional asset allocation methods”, Bank Review, June 2016
  • ” The progressive systematization of the alpha of managers”, Bank Review, July 2016
  • ” The hope of effective diversification through academic style bonuses”, Banque Revue, September 2016
  • ” For a robust implementation of factor investment strategies”, Bank Review, December 2016
  • “L’investissement factoriel”, Vanguard, April 2015

BONDS & SHARES

BONDS & SHARES is a participatory non-Profit information platform for, through and by experts in finance and business. For more information please visit www.bonds-and-shares.com


Leave a Reply

Your email address will not be published. Required fields are marked *


About us

Bonds & Shares is a participatory non-Profit information platform for, through and by experts in finance and business.


CONTACT US

CALL US ANYTIME



Latest posts



Newsletter


    Categories