Investment - Articles - Multi factor method can enhance DC schemes equity portfolios

 Factor investing, also known as ‘smart beta’, has experienced a sharp rise in recent years as a low-cost approach which can help DC schemes to improve member outcomes. Aon has identified four preferred equity factors that all offer the potential for long-term return enhancement and/or risk reduction: low volatility, value, quality and momentum.

 Chris Inman, head of DC investment advisory at Aon, said: “We are recommending that all DC schemes introduce further diversification into their equity portfolios and believe that factor investing is an important component of this. We believe that DC schemes should consider combining the four factors into a multi-factor equity portfolio in order to smooth returns and mitigate the risk of underperformance from any one factor. Moreover, with an appropriate governance structure and oversight, implementing medium term asset allocation views can enhance returns.

 “There are a number of important considerations when constructing a multi-factor portfolio and our analysis has led to the recommendation that DC schemes should concentrate on global developed markets, begin by equally weighting the factors, and neutralise the regional weights.”

 
 ‘The Rise of Factor Investing’ is available here