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Uncovering the DNA of markets

Monday, February 27, 2017

Our approach to diversifying assets makes us a little different from most other asset managers. That’s because we try to look at the ‘DNA’ that drives a market – something known as ‘factor investing’

How we use ‘factor’ investing in our Multi-Asset portfolios
One of the things that sets our Multi-Asset portfolios apart is our use of ‘factor’ investing when selecting assets. The main reason to hold a variety of asset classes is to make your portfolio more stable. But this idea only holds true if the assets you select are uncorrelated. In other words: asset class returns are independent of each other, thereby reducing a portfolio’s overall risk.

Since 2008, however, many assets that investors had always thought of as uncorrelated have begun to move together. In particular, to stave off recession, many governments have propped up the bond markets. As a result, the traditional uncorrelated relationship between bonds and equities is being questioned.

At Pacific Asset Management, we think differently about diversification. Instead of building portfolios based purely on a mix of asset classes, we consider the underlying factors that determine the risks associated with those asset classes. Such factors might include the price trends of the equity market, the size of a company or a bond’s sensitivity to interest rates.

Known as ‘factor investing’, this approach allows an investor to paint a much more comprehensive and accurate picture of the balance of risk and return in a portfolio. It’s a bit like the difference between understanding how the human body works or sequencing the human genome. An individual’s DNA paints a much more detailed picture of both their physical capabilities and health risks. Likewise, factor investing goes beyond a broad-brush understanding of asset classes to really dig into the ‘DNA’ of markets. ‘Factor investing’, ‘smart beta’, ‘risk premia’.

You may also see ‘factor investing’ referred to as ‘smart beta’ or ‘risk premia’. Whatever words are used, it’s just a way of identifying the drivers of markets.

At Pacific Asset Management, we have a dedicated team of specialists who use factor investing to understand what makes asset classes behave as they do. Their insights allow us to use diversifying assets to better balance risk return.

IMPORTANT INFORMATION | Issued and approved by Pacific Capital Partners Limited, a limited company registered in England and Wales, authorised and regulated by the Financial Conduct Authority . The information contained herein is not approved for use by the public and is only intended for recipients who would be generally classified as investment professionals. Information or opinions contained in this article do not constitute an offer to sell or a solicitation, or offer to buy, any securities or financial instruments or investment advice or any advice or recommendation in respect of such securities or other financial instruments. Where past performance is shown it refers to the past and should not be seen as an indication of future performance.

 

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