Schroders is launching a new equity fund for DC pension schemes that aims to outperform passives with a multi-factor approach designed to minimise the chance of underperforming them.
The Global Multi-Factor Equity (GMFE) adopts a multi-factor approach with the aim of outperforming the MSCI AC World with a low benchmark-relative risk approach.
The fund makes all its stock selections on the basis of ratings against five key factors – quality, momentum, value, low volatility and small cap – which Schroders says gives a more efficient approach to factor investing than constructing portfolios by buying tranches of funds investing in different individual factor. It argues this approach gives trustees a low-governance approach to equity investments with an ongoing charge figure of 24 basis points.
Schroders has also published a paper that argues, in the historical cases it studied, that a multi-factor approach leads to twice as much outperformance as a single-factor approach. It argues this is a value only portfolio will buy cheap stocks even if they are losers, while a momentum portfolio will buy winners even if they are expensive. Buying cheap losers would reduce the amount of momentum in an overall portfolio while buying expensive winners would reduce the amount of value in it. A multi-sector approach helps to avoid this effect, argues Schroders.
The fund aims to outperform the MSCI AC World by 100 basis points before costs and will be managed by Schroders Advanced Beta Team.
Schroders head of UK institutional DC Tim Horne says: “Governance and costs are rightly a key focus for UK DC pensions, but this should not come at the expense of returns – the key element which will ensure people can retire with confidence and security.
“GMFE brings investment innovation to the DC saver, targeting additional return compared to a passive equity solution in a risk-controlled way.”
Schroders head of multi-asset research and co-manager of the GMFE fund says: “Factor investing is a powerful tool for managing investments. By breaking down assets into factors, it can provide greater transparency of portfolio construction and greater control over the drivers of risk and return.
“While many of the concepts behind factor investing are nearly as old as investing itself, much newer is the idea of bringing them together systematically. The GMFE fund aims to allow investors to benefit from the key drivers of market returns in a risk-controlled way.”