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April 12, 2016 at 01:22 PM
Many investors are starting to rethink traditional investment models and consider new ways to structure their portfolios to achieve their investment goals – for instance, factor investing.
While research has shown factors such as size, valuation and momentum deliver a durable premium over the long term versus a market-cap weighted benchmark, a new research report by State Street Global Advisors finds that factor investing is attracting new interest.
“Building portfolios around factor risk exposures rather than asset classes alone is a significant shift away from traditional mindsets and governance models,” the report states. “That kind of change takes time and education, but the challenges posed by today’s markets are prompting more investors to consider a fresh approach.”
According to a recent survey of more than 400 global institutions, SSGA finds that one in four respondents felt their overall portfolio return expectations were not currently being met. And nearly all of the respondents (98%) expect significant change in the industry’s investment approach over the next five years.
Many respondents have already changed their asset allocation to address underperformance. According to the survey, 38% of investors have increased their allocation to smart beta, which SSGA defines as “part of a broad spectrum of factor-based approaches that include highly sophisticated active strategies and techniques.”
SSGA also finds that three-quarters of the respondents who had implemented smart beta said they found moderate to significant improvement in their ability to meet their long-term objectives.
Lori Heinel, chief portfolio strategist at SSGA, sees the broader uptake in factor investing as a response to lower-for-longer return expectations.
“One obvious catalyst is the expectation that returns are going to be lower than most investors had anticipated,” Heinel says in the report. “Our projected returns across all asset classes are in the low single digits, so it is clear that for the next few years just relying on beta returns isn’t going to be enough.”
The SSGA survey found generally elevated long-term return expectations across most asset classes, which according to SSGA suggests expectations have adjusted to a potential lower-for-longer return scenario. According to the survey, the mean long-term return expectations across every major asset class save commodities and bonds were in the double digits.
