All investors are likely hunting for undervalued assets, but their approach to factor investing in portfolio asset allocation can vary significantly.
Value investing strategies focus on companies that are undervalued by the market, with the expectation the lower market valuation will lead to higher returns.
Wealth Investors director Chris Youssef says the limitations of trying to forecast market movements has led to a preference for data-driven strategies to build robust portfolios.
“Factor ETFs play a significant role in our approach, offering a low-cost option to access specific sectors efficiently,” Youssef says.
“The ETF market has experienced significant growth in recent years, providing investors with a diverse range of investment opportunities.”
Youssef says the firm incorporates strategic tilts towards value companies, small-cap firms, and emerging markets within its portfolios, backed by comprehensive research and empirical data.
“This approach allows us to capture potential returns while mitigating risk factors,” Youssef says.
“Our investment process is systematic and evidence based. By prioritising factors that have demonstrated consistent performance over time, such as value, size, and geographic diversification, we construct portfolios designed to deliver long-term financial success.”
Youssef says although the firm will stay informed about the latest investment trends, they remain committed to evidence-based investing.
“Our goal is to build portfolios that are resilient and capable of weathering market fluctuations,” Youssef says.
“Our approach to fitting factor ETFs into portfolios is grounded in a clear investment philosophy, rigorous use of data, and a disciplined, systematic strategy. This ensures that our clients benefit from well-constructed portfolios tailored to their specific financial goals.”
Atchison investment analyst Mishan Dahia says adding factor ETFs as satellite holdings can complement a core portfolio, with the potential to provide uncorrelated returns and higher risk-adjusted returns to that of a standard core portfolio.
“Factor ETFs offer exposure to specific investment themes such as value, momentum, quality, and low volatility,” Dahia says.
“A core portfolio usually consists of broad market index ETFs, ensuring extensive market exposure and minimal fees. Factor ETFs then support the core portfolio, flexing specific factors that advisers deem appropriate for the given market cycle.”
He adds the weight, duration held, and type of factor ETF used will vary based on core portfolio positioning, investment thesis, and most importantly, client objectives and client risk tolerance.
Centaur Financial Services managing director Hugh Robertson says thematic investing is a “growing beast” in portfolio construction, evolving into multi factor strategies to try and capture market inefficiencies that market weighted indexing can’t do.
“Thematic ETFs involve taking a view,” Robertson says.
He adds that he’s made significant allocations to quality and equal weighted factor investments but says changing market conditions could see value come to the fore as one of the more attractive options.
“If there are stormy clouds ahead then value could stand out and momentum can take advantage of the trends to capture outperformance, in theory,” Robertson says.
However, when it comes to portfolio allocation, he keeps it to around 5 to 10 per cent as a portfolio diversifier outside of the core options.
“As more and more volatility comes into markets I feel factors will have a prominent role to take advantage of market capitalisation weighted indexes, or to complement around them,” Robertson says.
