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Factor Diversification: ActiveBeta Equity Strategies from Goldman Sachs Asset Management

Part of Institutional Investor's Report on Smart Beta

With its acquisition of Westpeak Global Advisors in June of this year, Goldman Sachs Asset Management (GSAM) has what it believes is a comprehensive and customizable platform for implementing a smart beta program in a global equity portfolio. Kal Ghayur, head of GSAM’s ActiveBeta Equity Strategies team, tells us how.

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How does Goldman Sachs define smart beta?

Broadly, smart beta is any index-like portfolio that is not weighted by market capitalization, but in practice, there is much more to these long-only equity strategies. Smart beta investing seeks to gain efficient exposure to common equity factors—value, momentum, quality, and volatility—through rules-based, non-cap-weighted portfolios that aim to generate positive excess returns over the long term.

What are some of the potential benefits?

GSAM’s patented ActiveBeta Equity Strategies provide clients the opportunity to tailor their exposure to equity factors using a unique and customized approach.  The benchmark-aware portfolio construction methodology allows for client-specified tracking error objectives in individual or combined factor portfolios. Individual ActiveBeta Smart Portfolios can be blended to allow investors to diversify across a custom mix of investment factors that reflect their own investment beliefs and objectives (e.g., enhancing returns vs. dampening risk).  Individual factor portfolios can also be used as completion vehicles to manage factor exposures and risk within a broader portfolio structure (e.g., adding momentum to a portfolio that has a pronounced value tilt).

The main benefit is transparency and the control that transparency enables.  With smart beta, investors can make a direct and intentional allocation to a set of common factors rather than accept the allocation provided indirectly by an active strategy for which exposures may be difficult to determine. Another is a potentially more attractive cost profile.  It is generally less expensive to gain factor exposures through smart beta than through active management.

How does smart beta work best in a portfolio?

Historically, investors have achieved exposure to common factors through either traditional market cap–weighted passive indices or active management. Using smart beta to replace a passive cap–weighted strategy may be sensible for some investors who redefine their policy benchmark. For example, an investor may decide to substitute a portion of their existing cap-weighted index with a low-volatility index. This perspective focuses on absolute return, absolute risk, and Sharpe ratio. On the other hand, using smart beta to replace active management may work for investors who continue to use cap–weighted indices to define their policy portfolio. In these cases, smart beta strategies may be a good substitute for an investor’s active allocation. These investors seek to implement smart beta strategies relative to the cap-weighted market index, within the constraints of their tracking error budgets. This perspective focuses on relative risk and return.

What differentiates GSAM from other providers of smart beta strategies?

Our ActiveBeta investment methodology allows us to package investment factors in a customized, building-block approach for each unique portfolio. ActiveBeta Equity Strategies include a diverse set of investment factors called ActiveBeta Smart Portfolios, which form the basis of a factor diversification framework for pursuing explicit investment objectives or factor diversity. They are designed to harvest factor betas in an efficient, rules-based, and cost-effective approach with a focus on benchmark-relative implementation. GSAM’s ActiveBeta strategies are designed to be consistent across factors—each portfolio is constructed with a similar methodology. They allow investors to pursue new portfolio structures that may potentially realize higher levels of investment performance and implementation efficiency. Finally, GSAM’s smart beta platform provides practical tools for measuring and diagnosing factor exposures and return contributions of active strategies and client portfolios, helping facilitate more efficient portfolio structures.

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. 

©2014 Goldman Sachs. All rights reserved.

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For more information,

please contact:

Craig Russell

Managing Director,

Head of the Americas Institutional Client Business

craig.russell@gs.com

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