The topic of factor investing has been hard to ignore in the last few years. Many new products (often termed smart beta) have been launched, seemingly offering a “silver bullet” for investors, claiming sustainable excess returns with high levels of transparency and very low fees.
Mercer has been advising on factor exposures in equity portfolios for well over a decade, including recommending a dedicated low volatility exposure since 2010 and a five factor framework for building robust equity portfolios since 2014.
Factor strategies vary hugely and should be considered a form of active management, even when offered in index format. Some factor strategies can play a useful role in building robust equity structures, bringing cost and transparency benefits. However, as with all active approaches, investors need to ensure that they have a full understanding of each strategy’s characteristics, pitfalls and expectations before investing.