By Alexandros Severis, Smart Beta Product Manager

Factor investing is no longer a niche strategy frequently applied by the sophisticated few. These strategies’ potential for improved risk-adjusted returns has led to successful long-term relationships with pension funds, and a growing demand from retail clients.

A common issue is that investors frequently feel that they lose control or are led astray by the promises of factor strategies relative to actual outcome. The problem: unintended factor exposures created as a result of index construction and factor correlations.

For example, let’s consider a multi-factor portfolio constructed using a traditional tilt framework with the aim of achieving specific fixed exposures to the Value and Quality factors. The chart below (Chart 1) shows that, despite incorporating Value and Quality tilts and ignoring Momentum, factor correlation unintendedly led to an unwanted negative exposure to the Momentum factor (Chart 2)....

The new FTSE Target Exposure Indexes are a suite of benchmarks designed to focus on specific characteristics— such as factor, climate and ESG exposures—while minimizing all off-target, consequential exposures, to deliver a “near pure” index. Target exposures are completely flexible and can be combined to cater to specific client objectives and investment outcomes.

Factor strategies differ significantly in terms of portfolio construction. There is much debate regarding the pros and cons of alternative construction approaches. A vigorous debate has unfurled over the best way to combine factors into a single portfolio, with some practitioners preferring the top-down approach and others favoring a bottom-up "integrated" approach.

In this paper, we:

By Alexandros Severis, smart beta product manager

Factor investing is no longer a niche strategy frequently applied by the sophisticated few. These strategies’ potential for improved risk-adjusted...

Factor strategies differ significantly in terms of portfolio construction. There is much debate regarding the pros and cons of alternative construction approaches. A vigorous debate has unfurled over the best way to combine factors into a single portfolio, with some practitioners preferring the top-down approach and others favoring a bottom-up "integrated" approach.

In this paper, we:

By Alexandros Severis, smart beta product manager

Factor investing is no longer a niche strategy frequently applied by the sophisticated few. These strategies’ potential for improved risk-adjusted returns has led to successful long-term relationships with pension funds, and a growing demand from retail clients.

A common issue is that investors frequently feel that they lose control or are led astray by the promises of factor strategies relative to actual outcome. The problem: unintended factor exposures created as a result of index construction and factor...

L'indice a été développé en partenariat avec FTSE Russell, le fournisseur du principal indice de la Bourse de Londres. Il va reproduire les performances de sociétés dont les agissements sont jugés compatibles avec les objectifs de l'accord de 2015.

The coronavirus outbreak rekindled worries about slowing global growth, depressing risk appetite and pushing bond yields lower, while US equities posted modest gains. Join Philip Lawlor, managing director of Global Market Research at FTSE Russell, to hear about market performance in January.

By Rolf Agather, managing director, applied research at FTSE Russell

As the bull market marched on in 2019, rising markets continued to lift US stocks to new highs. Indexes are generally the metric for these milestones, which can at times raise questions about uneven performance—particularly when an index reaches an all-time high while another comparable index doesn’t. But comparisons such as these lose sight of the very purpose of a passive index, which is to stay true to its stated objectives rather than outperform them.

Let’s take, for example, two indexes designed to measure the US small cap equity market. While they might appear similar in name, they can be significantly different in composition. If these two indexes are constructed using a different set of rules, they can vary with respect to the nature and number of their constituents, which can result in distinctly different characteristics. For example, while both indexes might claim to be broad,...

The coronavirus outbreak rekindled worries about slowing global growth, depressing risk appetite and pushing bond yields lower, while US equities posted modest gains. Join Philip Lawlor, managing director of Global Market Research at FTSE Russell, to hear about market performance in January.

Is it better for a bond index to be able to change every day, or only every month? This paper discusses the pros and cons of each approach, using examples taken from the FTSE Canada Universe Bond Index, which rebalances daily, and a specially created equivalent series that uses the same methodology, except that it rebalances monthly.

This paper will:

Climate risks are likely to affect the long-term investment horizon of sovereign bond investors, well beyond the general short-term perspective of financial investments. Alongside traditional fundamental sources of relative value and risk, such as the perceived health of government finances, inflation expectations and the future path of interest rates, sovereign bond investors should increasingly consider the material effects of climate change.

In this paper, we introduce what could be the impact of climate change for sovereigns via the changes in fiscal policy, social contract and political stability, in both advanced and emerging economies. First, we discuss the characterization of climate risks, which can be divided between climate physical and transition risks. Second, we address the concern of the financial materialization of these risks. We try to address both topics in this paper, introducing the integration of climate risks in sovereign risk assessment.

Climate risks are likely to affect the long-term investment horizon of sovereign bond investors, well beyond the general short-term perspective of financial investments. Alongside traditional fundamental sources of relative value and risk, such as the perceived health of government finances, inflation expectations and the future path of interest rates, sovereign bond investors should increasingly consider the material effects of climate change.

In this paper, we introduce what could be the impact of climate change for sovereigns via the changes in fiscal policy, social contract and political stability, in both advanced and emerging economies. First, we discuss the characterization of climate risks, which can be divided between climate physical and transition risks. Second, we address the concern of the financial materialization of these risks. We try to address both topics in this paper, introducing the integration of climate risks in sovereign risk assessment.

2020 promises to be complex, with an upcoming election, slowing corporate earnings, and an aging bull market. Despite strong returns, earnings growth was flat, which has pushed valuations higher. Where can investors look for opportunities in this market? Small- and mid-cap equities—especially the quality ones that consistently grow their dividends—have shown resiliency in tough markets and may be worthy of consideration.

By Philip Lawlor, managing director, head of global market research

Global equity markets rode some dramatic twists and turns in 2019, and factor performance followed suit. Our latest Factor Indicator report highlights the most notable theme in factoring investing of the past year. They may provide important clues for what lies ahead in 2020: Quality bias held strong despite Q4 risk rally

While risk appetite has markedly improved in recent months, investors generally remained guarded, favoring the stocks of companies with relatively reliable profitability and stronger balance sheets. These preferences helped solidify Quality (and Profitability) factor leadership across most markets (except in the UK) for the year, while the Q4 rallies in Value and Size faltered by year end.

Source: FTSE Russell and Refinitiv. Data through December 31, 2019. Regional Factor Indicators represent hypothetical, historical performance, based on FTSE Global Equity...

Market experts from leading global index provider FTSE Russell and CME Group recently gathered to share their insights on US small cap equities in 2020, including opportunities and risks on the horizon and how investors can use index-based investment products to optimize exposure to this important asset class.

This lively webinar discussion examined the US small cap equity market from a long-term macroeconomic viewpoint as well as a bottom-up fundamental perspective, touching on major factors that may come into play in 2020 as investors navigate the US election, an uncertain global growth environment, historically elevated valuations and geopolitical concerns.

Alec Young – managing director, global markets research, FTSE Russell:

“The Russell 2000 Index notched a healthy 25% total return in 2019. In terms of what 2020 may have in store, the domestic economic picture looks good, financial conditions remain highly accommodative and leading indicators...

As investors race toward the finish for 2019 and look ahead to 2020, US large caps continue to outperform small caps while growth still leads value. FTSE Russell market experts share insight on whether these trends are likely to continue into the new year.

Alec Young, managing director, global markets research, FTSE Russell:

“This year has seen some very pronounced size and style performance trends as investors have favored large caps over small caps and growth over value. Large caps and growth stocks have benefited from macro tailwinds including fears of slowing global growth and endless US-China trade uncertainty, both of which have pushed investors towards higher quality blue chips with more dependable growth than their more economically sensitive, small cap, value counterparts. Growth worries have also driven interest rates to record lows, boosting large cap and growth indexes that have less exposure to financials, a sector whose margins are pressured...

Is it better for a bond index to be able to change every day, or only every month? This paper discusses the pros and cons of each approach, using examples taken from the FTSE Canada Universe Bond Index, which rebalances daily, and a specially created equivalent series that uses the same methodology, except that it rebalances monthly.

This paper will: