// INTERVIEW OP MAAT
Portfolio effects can be substantial, but are often neglected BY JAN JAAP OMVLEE
What is driving factor returns: Stock effects or portfolio effects? David Schofield, President at Intech International Division, Janus Henderson, takes a close look at what factors are, why they may work and when they may not. ‘A portfolio’s volatility is less than that of its stocks.’ Factors are seemingly everywhere in today’s investing
effects as we saw in the low volatility period in 2015 and the
landscape. The number of factors being ‘discovered’ or
first half of 2016, when investors were piling money into the
manufactured has proliferated, which could lead to shortcuts
low volatility stocks. Those stocks were strongly
and risks. David Schofield even uses the notion of ‘factor
outperforming in a rising market. You would not expect the
factory’. However, investor understanding has not kept up
most defensive stocks to outperform in a strongly rising
with this proliferation and responsible implementations are
market, and yet they were doing so and it was largely due to
getting rarer, he says. ‘The more successful and well
the flow of funds, the money chasing after a limited universe
identified a factor is, the bigger the danger of overcrowding.’
of stocks. The dangers when those bubbles burst, were experienced in the second half of 2016, when there was a
Why do you coin the term ‘factor factory’?
sharp reversal with considerable swings. So that is one of the
‘This is a bit of tongue-in-cheek humour, of course. We see an
risks.’
Foto: Archief BlackRock
expanding universe and we use the term proliferation, which different factors that are genuinely and justifiably generating
Can you highlight the stock effects versus the portfolio effects?
extra returns? That is questionable. Hence the use of the
‘Well, the stock effects are essentially effects that are
word ‘factory’. We want to alert investors to the risks of
unsurprisingly attributable to the stocks themselves. The fact
investing in things that are overly simplistic and are being
that these stocks display the common properties that we are
banged out, just to try to catch the next wave. We want to
talking about within the world of factors; factors that have
inform them what the risks are and how they should try to
strong value characteristics, or dividend yield characteristics,
understand the returns.’
or good volatility characteristics, or the fact that they have
has a sense of excess to it. Can there really be all these
high returns. Essentially, it is the observation that the factor
What are some of the risks involved? ‘There are lots of potential risks. One of the risks of the ‘big six’ – size, momentum, value, quality, low volatility or dividend yield – is well established. The more successful and
Figure 1: Size: Stock effects
well identified the factor is, the bigger the danger of overcrowding, with everybody following each other like sheep into the same factors. They can be prone to bubble type
The more successful and well identified the factor is, the bigger the danger of overcrowding, with everybody following each other like sheep into the same factors. 34
FINANCIAL INVESTIGATOR
NUMMER 7 / 2019
Source: Intech, Janus Henderson
