A New Series of Portfolios to Give You More Options
On April 1st (no fooling) we launched a new series of portfolios—the Factor Select portfolios. We created them in response to advisors who wanted our best ideas about how to build low cost, factor-based portfolios. A lot of work and research went into their design and we proudly offer them to give you more options for meeting your clients’ long-term investment needs.
What Are Factors?
Some of you may be unfamiliar with factors. They are characteristics common to a group of securities that help explain their returns. These characteristics cause securities that share a common factor to exhibit similar patterns of performance over time.
Decades of academic research has identified hundreds of factors. There are so many of them, in fact, that they are sometimes referred to as the “factor zoo.” They have been studied closely to screen out those that are anomalies in the historical data and identify those with a sound statistical basis, a plausible rationale, and favorable performance qualities.
Few factors have stood up to the scrutiny of the researchers. Only a handful of factors are considered robust enough to have both a reasonable chance of persisting in the future and a likelihood of positively impacting portfolio performance. They include “value,” “size,” “quality,” and “momentum.” These are the factors we emphasize in the Factor Select portfolios.
Even factors that are considered robust do not always result in outperformance. Their benefits are cyclical and are manifested intermittently. However, in the aggregate over the long term, these periods of outperformance have produced a quantifiable performance advantage.
Some factors have low correlations to each other. That is, when one factor is experiencing a period of outperformance, another factor may be experiencing a period of underperformance. This provides the opportunity to reduce volatility by diversifying among factors.
How We Build the Factor Select Portfolios
The Factor Select portfolios focus on four factors:
- Value: stocks that are trading at low prices relative to their intrinsic values or similar peers
- Size: stocks of companies with relatively small market capitalizations
- Quality: stocks of companies with low debt, high earnings quality, and strong profitability
- Momentum: stocks of companies whose stocks have been rising in value recently
First Ascent emphasizes these four factors because of the strength of the research supporting their expected persistence into the future. The statistical evidence is substantial and the theoretical rationale for each makes sense and appears to have explanatory power.
The four factors have relatively low correlation with each other. This offers the potential to generate a more stable return stream by diversifying among factors. We weight the four factors roughly equally in the portfolios to provide a balanced exposure to each one.
We manage the Factor Select portfolios using an open architecture approach. This dramatically expands the universe of funds we can consider for our portfolios and allows us to draw on the expertise, research, and resources of many knowledgeable and experienced firms.
Open architecture also allows us to select the most appropriate investment vehicles for our portfolios. We are not relegated to using products from a single firm and are free to use either ETFs or mutual funds, depending upon the circumstances.
Another advantage of open architecture is that not every firm that offers factor-based funds defines or combines factors in the same way. By using funds from firms that define and combine factors differently, we get an added diversification benefit.
As with all First Ascent portfolios, the Factor Select portfolios are managed using an “elegantly simple” approach designed to help clients keep more of what they earn. This approach minimizes portfolio costs and expenses consistent with the best interests of our clients.
When you put it all together, the Factor Select portfolios offer advisors a way to access professionally managed portfolios for their clients that combine the following benefits:
- Global diversification
- Multi-factor exposure
- Balanced factor weighting
- Open architecture
- Low fees and expenses
To help you better understand our new Factor Select portfolios, we’ve prepared a white paper that provides more detail about how they are managed and the research behind their construction.