Click HERE to hear from fundamental funds who are using factors to improve results - A 30 minute Webinar with our Partner MSCI Barra, entitled "How Factors SuperCharge Idea Generation". Or read on for a brief review.
Why should you even care about Factors?
Jonathan Neitzell, former PM at GSAM, and now Anduril Partners Founder
talks about integrating factors into his clients' funds:
Takeaway - Clients adding factors are gaining sustainable advantages - no more conversations that start with, "no idea why the stock or portfolio was up/down". They truly understand where gains/losses are coming from, they know their blind spots, my teams are making higher conviction calls (based on hard data), and with EDS, they can easily separate signals from noise.
Takeaway - However, to be successful, it requires seamless integration & broad participation from your investment team. And historically, this has not been easy - but now MSCI & EDS have come together to provide unmatchable value for your team. For example, clients have simple, actionable scorecards, that provide instant perspective on market flows and themes, even amidst the most dislocated markets.
Using Z-Scores, we can quickly put factor data into "context", helping determine if we should pay attention to the data.
And in this case, the far right column tells us that many of these sectors are between 1 - 2 standard deviations away from their average annual returns - meaning only 14% of the time have they ever moved this much during a yearly period.
And with EDS & MSCI, you have the flexibility to go deeper,
SuperCharging your idea generation & research process
CERN is in your wheelhouse, it has underperformed and has exposure to the areas of the market, such as mid-capitalization names that are under pressure.
CERN is also favorably exposed to positive factors, such as Earnings Quality and Momentum that the market likes for safety reasons.
I can then take names of interest and begin my fundamental due diligence process, after noting that perhaps they have been unfairly punished by peer Factor headwinds, rather than for stock specific reasons. .
Actionable intelligence on names in my portfolio, now?
Where is the current portfolio in terms of exposures. I can quickly see that two of my largest exposures are Momentum and Book-to-Price, and that is mainly due to a single portfolio manager.
I can also click on a specific exposure like Momentum, and it will automatically show me all the positions in the portfolio (both positive or negatively exposed) sorted by highest influence.
And turning to our topic of idea generation, if we wanted to take observations from our scorecard showing extended factors, I could compare that view with my current exposures, seeing exactly which names or analyst to discuss the primary impacts to the portfolio – and take action to accentuate or balance my current positioning.
Getting to Where You Want to Go
EDS is particularly useful for teams that quickly want to roll up portfolio positions into category weights like Asset Selection (Alpha) and Factor contribution.
And while the vast majority of risk tools I have historically worked with are backwards looking with Captain Obvious hindsight observations, EDS enables forward action- orientated decisions using MSCI data.
For example, I can either target specific names I know represent the majority of my exposure to an undesired factor and model changes using trade simulation, OR I can ask the system to do it for me by setting a number of general parameters that I have specified, like max turnover, gross exposures, max position size change, and my ending volatility target.
This allows me to translate an observation into specific action, often in the context of other fundamental perspectives I may be integrating into my final position size decisions.
Please contact EDS at email@example.com for more information