The highlight of August 2020’s VC call was a presentation from Antonio Picca, Head of Factor Based Strategies at Vanguard, who took the group through building strategies that deliver strong factor exposure.
Firstly, Antonio took the group through Key decisions when building factor strategies. These amounted to the selection universe, the characteristics and weighting methodology. Depending on which were chosen, an investor may end up with one of four different value strategies.
Antonio showed how a value strategy that took into account large/small-cap universe, price/book, price earning, price/cashflows and a more diversified factor weighting have delivered higher excess returns and had a higher information ratio in the period between 1963 and 2020 than other strategies.
Antonio then did the same for quality and momentum. First showing that targeting quality across the small/large cap universe, operating profitability and a more diversified factor weighting delivers higher excess returns and a higher information ratio. Then showing that targeting momentum that took into account the small/large universe, 11-month momentum only and more diversified factor weighting delivered higher excess returns and had a higher information ration than other strategies.
Combining these factors into a multi factor exposure, Antonio showed that investors could allocate half as much to this combination of multi-factors against other combinations and achieve similar returns. This would allow investors to lower manage their risk more efficiently.
After Antonio’s presentation and Q&A, the call ended with a discussion between firms on value and communicating the message of staying the course in periods when a value strategy is underperforming. Some of the key points revolved around who is and isn’t bothered by a period of underperformance and how important it is to highlight the potential for value to underperform over long run periods, so clients understand all potential outcomes.