Research Affiliates: Spread Factor Bets and Time Carefully
Research Affiliates' Feifei Li discusses the firm's approach to multifactor funds.
Research Affiliates' Feifei Li discusses the firm's approach to multifactor funds.
Adam McCullough: Hello, I'm Adam McCullough. I'm a passive strategist at Morningstar's ETF Group. I'm here with Feifei Lee, the director and global head of Research Affiliates Investment Management Group. We're here at the 30th annual Morningstar Investor Conference.
Thanks for joining us today, Feifei.
Feifei Li: Thank you for having me.
McCullough: Later today, we have a panel about multifactor funds, and I wanted to get a little bit into Research Affiliates' approach to multifactor funds. How do you think about how you construct a multifactor fund and what are some of the pros and cons of your firm's approach?
Li: We are trying to offer a multifactor strategy, which provides investors more sensible exposures to robust equity factors. We have done very extensive research on factor investing and also implementation, so hopefully we can help investors to achieve great investment outcomes not only on paper, but also with real-life assets.
I would just emphasize maybe a few features I believe how RAFI dynamic multifactor approach differentiates itself from other providers' products. First of all, it is a multifactor strategy which combines individual factor portfolios, which allow for very straightforward performance attribution, requires low-governance cost of foreign investors.
McCullough: It's much more transparent.
Li: Yes. It's very transparent. When they outperform or underperform, you know exactly which particular factor is contributing. In addition, our approach basically includes five factors, five underlying factors: value, momentum, low risk, quality and size. Those are all the factors, have very strong theoretical foundations, and also empirically robust.
McCullough: So all very well-vetted in academic research and across geographies, across in-sample, out-of-sample data.
Li: That's right. We choose the factors to be included, is very strong criteria, yes.
The third one I would say, our strategy actually offers pretty balanced factor exposures, loadings on factors, toward those sources which we believe will provide long term, positive access return.
McCullough: The goal is to spread out, you're about to cross multiple factors that, over the long run, it works, but you may not necessarily know which one will work at a certain time. Is that fair?
Li: That's correct. So we would like to have diversified paths across all the factors, we would like to get hold of.
McCullough: Great point. I know that your firm also has done some research on factor timing and maybe factor crowding. Do you want to talk a little bit about how your firm thinks about that? When is maybe a good time to take advantage of an overcrowded or undercrowded factor?
Li: Absolutely. That's a very important feature of our dynamic multifactor strategy, as well. We do believe this particular factor timing approach can help address investors' concerns about rising evaluation, and also prominence of certain individual factors. One, they are experiencing higher adoption rates over recent years. We are very strong, value-investing believers. So we do think "buy low and sell high" makes sense, whether it's about individual securities or it's about factors. However, while you deal with the factors base, there is, the dimensionality is very significantly reduced. The total number of a robust equity factor is a single digit. When you deal with cross-sectional equity space, you do have thousands of securities to play with. So the efficacy of timing in the factor space is a lot weaker than individual stock space.
McCullough: That's because there's about as many advantages to taking advantage of, or any mispricings to take advantage of.
Li: That's right. And any statistical significance of the advantage from timing has to require really long history, because you don't have lots of cross-sectional observations.
McCullough: Gotcha. So spread your factor bets, and time carefully.
Li: That's correct. Yes.
McCullough: All right. Feifei, thanks for joining me today. This is Feifei Li, the director and head of the investment management group at Research Affiliates. I'm Adam McCullough here at the Morningstar Investor Conference.
Thank you again, Feifei.
Li: Thank you so much, Adam.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.