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Factor investing – a different approach

16 November 2016 | Portfolio construction

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James Norton: Factor investing is known as many things: smart beta, enhanced indexing, and alternatively weighted strategies. But how does it work for investors? I am James Norton, Senior Business Development Manager at Vanguard and I am joined by Brian Wimmer, Vanguard Senior Investment Strategist. Brian, regardless of the different labels, factor investing is on the increase. Why is that?

Brian Wimmer: Well, first of all, we have seen over the last two to three years, I would say, a growing understanding. Part of that is the increase in the amount of products, but also part of that is an increase in the education that is available. Investors are starting to realise how they can potentially use factor products to tailor the risk and return characteristics of their portfolio.

James Norton: So we have four factor ETFs at Vanguard, how did we choose those strategies?

Brian Wimmer: Well, the interesting thing is you look back at the academic literature, you find that there are over 300 factors that have been identified. Now, certainly, all 300 of these don't necessarily deserve a place in a portfolio, so we need to reduce the list. So we do that by asking ourselves a few questions:

  1. Is there an enduring logical rationale behind certain factor strategies?
  2. Have we seen empirical evidence both through long periods of time and in different geographic regions that would demonstrate performance that is favourable for certain factor strategies?
  3. Can we take some of those factor strategies and actually implement them in real world portfolios?

James Norton: Our ETFs are quite different to our competitors. They are global, for a start. Why is that?

Brian Wimmer: Well, when we think about any form of investing at Vanguard, we start with diversification as one of our key tenets. So when we talk about factor strategies, given that we have seen different factors provide improved performance around the world, not just in specific locations, we then can apply that global mentality to factor products and give investors, ultimately, that diversification that they're looking for.

James Norton: Another big difference is that the ETFs don't track an index. Why are we using an active quant strategy in managing these funds?

Brian Wimmer: It is important to first explain what we mean by “active quant process” in this case. We're not talking about a portfolio manager making holistic or sweeping changes in a tactical portfolio. This is really about a long-term strategy, but the need of the portfolio manager is to do two things:

  1. Manage exposures to certain factors
  2. Also manage transaction costs within the portfolio

By using an internal quant process, we feel like we have the flexibility to do that, perhaps better than we could have if we were utilising an external benchmark.

James Norton: Thanks, Brian.

At Vanguard, we have selected factors that we believe are enduring, we have gone for greater global diversification, and we have taken an active approach for more consistent factor exposure.

Thanks for watching.

Important information:

This video is for professional investors and should not be distributed to, or relied upon by, retail investors.

This video is designed only for use by, and is directed only at, persons resident in the UK. It is for educational purposes only.

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

The material contained in this video is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

The information in this document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this presentation when making investment decisions.

The opinions expressed in this video are those of individual speakers and may not be representative of Vanguard Asset Management, Limited.

For further information on the fund's investment policy, please refer to the Key Investor Information Document ("KIID"). The KIID and the Prospectus for this fund is available in local languages from Vanguard via our website: https://global.vanguard.com/.

Issued by Vanguard Asset Management, Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

VAM-2016-08-01-3798

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