Core Equity100, Syfe’s all-equity portfolio, is a smart beta portfolio built using a multi-factor methodology. In recent years, smart beta investing has become increasingly popular.
It is a strategy that seeks to deliver better returns by providing exposure to equity markets and to one or more factors at a lower cost. Factors are the characteristics that drive investment returns. This is why smart beta is sometimes also known as factor investing.
From an academic perspective, smart beta aims to enhance systematic returns by extracting risk premia from several factors. Risk premium is the additional return an investor receives for taking on extra risk, compared to that of a risk-free asset, in a given investment. To harvest risk premia, smart beta portfolios are tilted to one or multiple factors that contribute to outperformance.
Factors are not new. They are grounded in rigorous academic research and backed by Nobel prize-winning work, the most famous being the Fama-French three-factor model. Conceptualized by Nobel laureate Eugene Fama and Kenneth French in 1992, the model states that market returns can be explained by three factors – size, value, and market risk.
Fama and French found that, over time, small-cap stocks earned higher returns than stocks with a large market cap on a systematic basis. The value factor was established based on the stronger performance of stocks with a low price to book ratio (i.e. value stocks) as compared to stocks with a high price to book ratio (i.e. growth stocks).
Since then, other factors have been identified and become widely accepted within academia. Fama and French even expanded their three-factor model to include two additional factors in 2014.
Syfe’s multi-factor approach
One way funds use factors to construct portfolios is to select individual factors they believe will outperform and then tilt their portfolios to those factors. For instance, if fund managers wish to follow the Fama-French three-factor model, they may allocate a judicious percentage of their portfolio to small-cap and value stocks.
Similarly, Syfe’s investment team has taken into consideration the following factors when constructing the Core Equity100 portfolio: growth and value, volatility and country exposure. These factors have been selected to generate better risk-adjusted returns.
Here’s a closer look at each Smart Beta factor.
- Growth & Value. While the growth factor remains relevant given the fundamental shift to greater technology adoption globally, the recent rotation to value should not be ignored. We tilt our equity selection to both growth and value stocks by including the tech-heavy Invesco QQQ ETF (QQQ) and the Invesco S&P 500® Equal Weight ETF (RSP). RSP adds exposure to smaller-cap and value stocks.
- Volatility. The low-volatility tilt is achieved by using multiple sector ETFs – Consumer Staples, Healthcare, Utilities. These sectors have been chosen because they collectively generate the highest risk-adjusted returns for the lowest amount of volatility on a portfolio basis.
- Country exposure. Our enhanced exposure to China and Chinese tech stocks represents a country tilt towards China, given the country’s robust growth potential and consumer spending trends. This factor is expressed using iShares MSCI China ETF (MCHI) and KraneShares CSI China Internet ETF (KWEB). These collectively provide exposure to some of China’s most important companies like Alibaba, Tencent, Baidu and Meituan
Reversion to the mean
Mean reversion is one of the most reliable predictors of long-term returns. In essence, it assumes that stock prices or factors move to an equilibrium level over time. When stock prices rise too high by historical standards, they will eventually correct and revert to past norms. Stock returns do not mean revert from month to month. Instead, it can take years or even decades for values to revert.
Mean reversion offers an explanation for why value factors have not performed well in recent years despite being outperformers in previous decades. Ultimately, factors have to-and-fro reversions; in the current period, we’re starting to see value re-emerge.
Dynamic factor selection
Over the long term, we recognize that a factor that may be compelling during a certain market cycle may be less so in another.
Syfe has addressed this limitation by implementing a dynamic factor selection and weighting methodology for the Core Equity100 portfolio. Based on broader cyclical trends and changing market conditions, we will dynamically manage the factors our customers are exposed to.
For example, in our April 2021 rebalancing, we moderated the factor tilt to large-cap stocks by adding the Invesco S&P 500 Equal Weight ETF (RSP). This means that every stock held by RSP has the same weight, regardless of how large or small the company is. RSP thus adds a Size factor tilt biased towards small-cap stocks. At the same time, RSP also simultaneously adds a Value (Vs. Growth) factor tilt.
To be sure, dynamic factor selection does not mean we will be rushing in and out of factors. In a multi-factor portfolio like Core Equity100, it means that we might choose to over- and underweight selected factors to generate the most optimal risk-adjusted returns based on cyclical market conditions.
What’s in Core Equity100?
The portfolio is constructed using equity exchange traded funds (ETFs) that collectively invest in over 1,500 stocks from the world’s top companies. These include Microsoft, Amazon, Facebook, Walmart, Apple, and more.
Additionally, Core Equity100 uses a number of broad-based ETFs to provide international diversification across US, China, Europe and other markets.
Our ETF selection criteria
To implement our smart beta strategy, we use the most liquid and low cost ETFs to represent our selected factor tilts. Rather than including individual stocks in the portfolio, we use ETFs to provide broad and cost-effective diversification. And by choosing liquid and low-cost ETFs, we lower our customers’ investing costs, minimise bid-ask spreads, and allow customers the flexibility to enter and exit their investments whenever they need to.
To give Core Equity100 a growth tilt, we use the Invesco QQQ ETF. QQQ is a widely traded ETF that tracks the Nasdaq 100 Index and is weighted towards large-cap tech stocks that tend to be fast-growing.
For China exposure, we use iShares MSCI China ETF (MCHI) and KraneShares CSI China Internet ETF (KWEB). MCHI provides exposure to large and mid-sized companies in China. Its top holdings include Alibaba, Tencent, Ping An Insurance and Baidu. Meanwhile, KWEB focuses on Chinese Internet companies such as Meituan, Pinduoduo, and JD.com.
The low-volatility tilt is achieved by using multiple sector ETFs – Consumer Staples, Healthcare, Utilities, and Materials. These sectors have been chosen because they collectively generate the highest risk-adjusted returns for the lowest amount of volatility on a portfolio basis. Learn more about the ETFs within the Core Equity100 portfolio here.
Can investors DIY?
Some investors may be wondering if it is possible to implement a smart beta strategy in a Do-It-Yourself (DIY) manner. That’s possible, of course, by using factor ETFs to provide exposure to certain desired factors.
But what distinguishes Core Equity100 from factor ETFs is our blend of dynamic factor selection and portfolio optimization. With Core Equity100, you have a 100% equity portfolio that is well diversified across global markets, allowing you to invest in stocks easily from Singapore. You also have a portfolio that is tilted to key factors that have driven and will continue to drive outperformance.
Because factors do demonstrate some cyclicality, Syfe’s dynamic factor selection means there is no need to worry about missing out on strategic factor exposures. There is no need to analyse and choose factors as well – the Core Equity100 portfolio is optimised to tilt towards factors that will offer the highest potential risk-adjusted returns in the long run.
Smart beta made better with Core Equity100
Apart from the convenience and peace-of-mind that comes with a ready-made and professionally managed smart beta portfolio, there’s also the cost advantage Core Equity100 has.
The portfolio holds multiple ETFs. Replicating these ETFs would cost the DIY investor significantly in terms of brokerage fees and minimum investments. A better option would be to enjoy $0 brokerage fees and no investment minimums with Core Equity100. This way, investors can enjoy the long-term better risk-adjusted returns of smart beta factors while keeping their costs low.