The fund companies “don’t have to worry about advisors losing faith,” Lazaroff says. “They have to worry about [advisors’] clients losing faith.”
That explains why many asset management complexes are rolling out multifactor portfolios by the boatload. For example, when momentum is combined with value and quality or minimum volatility, clients won’t be hurt as much by exposure to any single factor.
Even with multifactor portfolios, consistency is paramount. Framsted says BlackRock conducted a survey several years ago of traditional active managers who outperformed their benchmarks. It found that active managers who had outperformed over the time period analyzed, a majority of the excess returns came from static factor exposures.
She thinks investors should have all five major factors in their portfolios. Whether they are overweight or underweight depends on the client.
Can multifactor investing be timed in the same fashion that some professional investors deploy sector rotation? Balasa says most of the serious research on this subject isn’t encouraging. It strongly suggests the best alternative is to select a factor weighting appropriate for the client and leave it in place.
State Street’s Bartolini goes further. “If you are timing factors, you are playing with fire,” he warns. If the goal is timing, he goes so far as to advise that it be executed at the single stock level, not with ETFs.
Logical though it sounds, broad multifactor diversification begs another question. Why not just buy the total market index?
The answer will likely emerge after the next major bear market when advisors will find out if factor investing really lives up to its billing and delivers excess returns with a lower beta.