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Goldman Sachs Asset Management (GSAM) has created a comprehensive and customizable platform for implementing factor investing in a global equity portfolio. Kal Ghayur, head of GSAM’s ActiveBeta Equity Strategies team, describes what it is, how it works and what investors need to consider. Could you describe GSAM’s ActiveBeta Equity Strategies?
Very broadly, GSAM’s ActiveBeta Equity Strategies comprise a comprehensive framework for factor-based investing. First, it covers each of the well-vetted factors—value, momentum, quality, and volatility—which have been shown to generate positive excess returns over the long term. Second, it’s consistent —we maintain a single methodology that is applied to capture different factors across market segments and geographies. Third, it’s customizable. We primarily serve investors who wish to implement factor-based investing relative to their policy benchmarks, which tend to be market cap-weighted. Therefore, customization happens at many different levels.
How is it customizable?
The customization is possible because our solution takes a simple, building-block approach. One level of customization is to implement our strategies based on the policy benchmark of each investor, whichever benchmark that is. It could be a large cap index, small cap, international, emerging markets, or others. We have the ability to cover all of the segments of global equities and the ability to design our strategies from any benchmark that an investor specifies.
The second level of customization is tracking error. We are able to customize the tracking error that the investor wants as we implement the factor tilts relative to the chosen policy benchmark.
The third level of customization is our factor diversification framework. In a single investment, we are able to customize the mix of factors appropriate for any particular client. For example, some investors may require a combination of value and momentum. Another investor may utilize a combination of low volatility and quality to pursue a defensive strategy. Another investor may be looking at a value and quality combination. We are able to offer a high degree of customization in an effort to blend the appropriate mix of factors according to a client’s specific investment objective.
Could you describe your methodology?
From an investment process point of view, there are certain differentiating characteristics. We employ a patented methodology and investment process which is designed to provide high efficiency capture of factors in a portfolio. The concept behind it is simple. We know that certain factors have existed and persisted over time and have performed very well compared to the market. This suggests that these characteristics can be used to identify stocks that are more likely to perform better than the overall market. To isolate them, we have developed a weighting methodology that is specifically designed to improve efficiency, meaning that the information contained in a factor is transferred into portfolio weights proportionally. For example, the most attractive security on a given factor, such as momentum, gets the highest weight in the portfolio, and the least attractive gets the lowest weight in the portfolio.
What should investors consider?
Investors should be mindful of factor diversification. Factors tend to have low or negative correlations with each other, which means that they provide valuable diversification benefits. If one factor is underperforming the market, another factor is likely to be outperforming the market. For investors, factor diversification strategies tend to provide superior risk-adjusted returns because of this benefit. When implementing factor-based investing, investors should note that individual factors have historically been highly cyclical, and they may go through periods of prolonged and pronounced underperformance, which can be hard to endure. Factor diversification may make it easier for investors to stay invested over the long term.
GSAM’s ActiveBeta suite allows us to work with our investors as a partner and solutions provider. We work closely with our clients to analyze their existing portfolios and to understand what kind of exposures they have. Then, we design bespoke strategies which seek to achieve their investment objectives.
by Kal Ghayur
Head of ActiveBeta
Equity Strategies Business,
Goldman Sachs
Asset Management
For more information,
please contact:
Craig Russell
Managing Director,
Head of the Americas Institutional Client Business
craig.russell@gs.com
This is for informational purposes only, and should not be construed as investment advice. Views and opinions expressed are for information purposes only and do not constitute a recommendation, offer or solicitation to buy or sell securities. This information does not take into account any investor’s investment objectives, financial situation or needs and should not be relied upon in making an investment decision, and GSAM gives no assurance or guarantee that any strategies discussed would meet an investor’s objectives, financial situation or needs. Investors are urged to consult with their financial advisers before making any investment decisions. ©2015 Goldman Sachs. All rights reserved. 154421.STR.MED.OTU