PLANSPONSOR - June/July 2019 - 45

of delegated portfolio management at
Willis Towers Watson, in New York City.
The graph also illustrates the value
of a multifactor approach, through a
diversified index combining all six of
the factors Russell develops. It shows
more stable returns than the Russell
1000 Index and outperformed it for most
periods. Lastly, note that, in 2017, the
three-year excess returns of all factors
collapsed and, further, moved closely in
line with one another.
Dimensional Fund Advisors in
Austin, Texas, has been at factor investing
for almost 40 years. " Through our
valuation framework, we find factor
premiums for value, company size and
profitability, " says Marlena Lee, co-head
of research. " Realized returns are 'noisy,'
and sometimes they are negative, but our
framework says investors should expect
those premiums every day, and in every
market and sector.
" Systematic investing should also
consider short-term and intraday drivers
of return, " she adds and cautions,
" There's a misconception that systematic
investing can be simple and that all you
have to do is sort through stocks once a
quarter or year. That's not the case. "
" Another difficulty is to measure
the success of multifactor strategies, "
says Pliner. " It's hard to disaggregate the
value added by each factor. It's not a setit-and-forget-it
strategy-there's a lot of
monitoring of the exposures. The tools
are getting better, but sponsors need to
have those internally or have a third party
conduct that research. "
According to Li, " It's important to
focus on craftsmanship: how a strategy is
constructed, the thought process behind
the engineering, and turnover control and
reducing unnecessary trades. " The last
aspect is underappreciated, she believes.
" The implicit market-impact costs of
certain low-volatility and high-dividend
strategies can be high, because they tend
to have more illiquid names. A thoughtful
design can save transaction costs in
double digits of basis points [bps]. "
Ted Noon, senior vice president at
Acadian Asset Management in Boston,
also advocates a multifactor approach, to
combine signals that will yield a more
stable source of return. He points out the
appeal to defined benefit (DB) plan sponsors
of strategies seeking the low-volatility
factor. " The idea is to lean in to lower beta
stocks, to collect the full equity market
premium but at a lower volatility.
" The most painful time is when
equity markets are dropping, and maybe
interest rates are going down, too, " Noon
continues. " A sponsor might settle for
assets not to rise as much in exuberant
markets and better align the portfolio
with the liabilities. It's an application of
a factor that has a valuable property for a
sponsor. " -John Keefe
NEXT STEP
Sponsors should consult with their
adviser to determine whether
factor analytics could strengthen
monitoring of their plan's current
roster of managers and strategies,
or whether adding a factor-based
strategy could help manage risks
or improve returns. Factors are
complex, however, and proper
application will likely increase
governance responsibilities.
Cyclicality of Excess Returns for Selected Equity Factors (Excess return %)
Annualized 3-year rolling excess returns for selected factor indexes for large-cap U.S. stocks, vs. the Russell 1000 Index,
January 2010 through March 2019.
Low volatility Value Yield Diversified
5
6
4
3
2
1
-1
-2
-3
-4
Source: eVestment
2012
2013
2014
2015
2016
2017
2018
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