Real Application of Factor Investing in SA Ann Sebastian STANLIB - - PowerPoint PPT Presentation

Real Application of Factor Investing in SA

Ann Sebastian STANLIB

FACTOR INVESTING

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

2

WHAT IS IT?

• A factor is a broad, persistent driver of long-term returns
• SA specific factors are Growth, Quality, Momentum, Analyst Sentiment and Valuation
• Investment decisions are based on how well companies score on these factors

WHY SHOULD YOU CARE?

• Norwegian Pension Fund – the turning point for factor investing from theory to reality.
• Lower fee structure compared to traditional active managers for systematic factor exposure
• Index beating returns in the long term

IS THE SA MARKET TOO CONCENTRATED FOR FACTOR INVESTING?

ACTUARI AL SOCI E TY 2019 CONV E NTI ON | 22 - 23 OCTOBER 2019

Concentrated equity markets are the rule, rather than the exception:

3

Source: S&P Indices & STANLIB Index Investments, May 2018

0% 10% 20% 30% 40% 50% 60% 70% 80%

Total of Top 10 by Market Cap Weight In Index

IS THE SA MARKET TOO CONCENTRATED FOR FACTOR INVESTING? INVESTING?

ACTUARI AL SOCI E TY 2019 CONV E NTI ON | 22 - 23 OCTOBER 2019

This is an issue for all active managers in SA:

4

64% of AUM is index cognisant Average realised tracking error in retirement active equity space is 3%* 1. 2.

Source: Morningstar and Alexander Forbes Survey July 2019 *Alexander Forbes Survey, benchmark cognisant category July 2019

32% 32% Split of AUM in SA by Index Cognisance

Retail Index Cognisant Instituitional Index Cognisant Retail Non Index Cognisant Instituitional Non Index Cognisant

CAN YOU BUILD AN INDEX-COGNISANT FACTOR PORTFOLIO IN SA?

STANLIB MULTI-FACTOR FUND

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

5

Performance vs Benchmark 3 Months 6 Months 1 Yr. 2 Yr. 3 Yr. Fund 4.13% 9.20% 3.33% 7.09% 4.80% Benchmark (Capped SWIX) 2.90% 6.86% 1.11% 5.17% 3.51% Relative 1.23% 2.33% 2.22% 1.92% 1.27% Risk 1 Yr. 2 Yr. 3 Yr. Tracking Error 1.18% 1.20% 1.56% Ranking vs Peers 3 Months 6 Months 1 Yr. 3 Yr. Performance Ranking 1st out of 40 funds 2nd out of 40 funds 5th out of 40 funds 5th out of 29 funds Source: STANLIB, StatPro, June 2019 Source: STANLIB, StatPro, June 2019 Source: Alexander Forbes Survey June 2019

4. Macro 1. Valuation 2. Trend 3. Dispersion

HOW DO YOU DETERMINE THE ALLOCATION TO FACTORS?

ACTUARI AL SOCI E TY 2019 CONV E NTI ON | 22 - 23 OCTOBER 2019

6

What is the future macro phase? How different are companies? 4. 3. 1. 2. How cheap is the factor? Has the factor been trending?

4. Macro 1. Valuation 2. Trend 3. Dispersion

HOW DO YOU DETERMINE THE ALLOCATION TO FACTORS?

ACTUARI AL SOCI E TY 2019 CONV E NTI ON | 22 - 23 OCTOBER 2019

7

What is the future macro phase? How different are companies? 4. 3. 1. 2. How cheap is the factor? Has the factor been trending?

WHAT IS THE FUTURE MACRO PHASE?

ACTUARI AL SOCI E TY 2019 CONV E NTI ON | 22 - 23 OCTOBER 2019

Proprietary Macro Indicator which utilises Machine Learning and Macroeconomic data to predict future macro phase:

8

• 2,50
• 2,00
• 1,50
• 1,00
• 0,50

0,00 0,50 1,00 1,50

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

Macro Phase Score

Macro Slowdown Expansion Contraction Recovery

Recovery 2016 Cyclical Value, +40% Defensive Value, +4% Rest of Factors, -18% Slowdown 2018 Quality, +26% Rest of Factors, +6% Expansion 2017 Momentum, +18% Rest of Factors, +9%

Source: STANLIB Index Investments

CURRENT FACTOR ALLOCATION IN STANLIB MULTI-FACTOR FUND?

ACTUARI AL SOCI E TY 2019 CONV E NTI ON | 22 - 23 OCTOBER 2019

9 Quality; 37% Growth; 28% Momentum; 13% Sentiment; 12% Defensive Value; 10%

Quality Growth Momentum Sentiment Defensive Value Source: STANLIB Index Investments

CURRENT TOP PICKS BY MULTI-FACTOR?

FACTOR SCORES FOR TOP PICKS

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

10

Source: STANLIB Index Investments

Company Valuation (10%) Analyst Sentiment (12%) Price Momentum (13%) Quality (37%) Growth (28%) MULTI-FACTOR SECTOR Kumba 0.80 0.90 1.40 2.00 0.30 1.20 GENERAL MINER Capitec

• 0.10

0.30 1.80 0.90 1.80 1.10 BANKS Santam 0.30 0.20

• 0.20

1.50 1.50 1.00 INSURANCE Clicks

• 1.50

1.40 1.50 0.60 1.20 0.80

• DISC. RETAILER

Anglo American Platinum 0.40 0.20

• 0.40

1.50 0.80 0.80 PLATINUM Anglo Gold

• 0.30
• 0.20

0.80 1.10 1.00 0.70 GOLD MINING Reunert 0.70

• 0.90

0.10 1.40 0.70 0.70 INDUSTRIALS Astral Foods

• 0.30
• 1.20
• 1.10

1.40 0.90 0.50 CONSUMER GOODS

IMPORTANCE OF UTILISING A DATA-DRIVEN APPROACH

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

11

FACTOR SCORES 6 MONTHS PRIOR TO EACH STOCK’S COLLAPSE

Source: STANLIB Index Investments

Company Date of Major Collapse % Price Change Valuation Analyst Sentiment Price Momentum Quality Growth MULTI-FACTOR SECTOR Brait 2018/08/29

• 19.4%
• 1.3
• 2.04
• 1.76
• 1.79
• 1.78
• 1.73

INVESTMENTS Steinhoff 2017/12/05

• 11.1%
• 1.54
• 0.94
• 1.69
• 0.64
• 0.5
• 1.12

RAND HEDGE Sasol 2019/05/21

• 13.0%
• 1.77
• 0.44
• 1.19
• 0.75
• 0.84
• 0.90

GENERAL MINER EOH 2017/12/05

• 61.4%
• 0.58
• 0.22
• 1.85
• 0.01

0.36

• 0.62

TELECOMS Tongaat 2019/02/21

• 20.4%
• 0.01
• 0.09
• 0.55
• 0.84
• 0.51
• 0.54

INDUSTRIALS MTN 2018/11/12

• 10.0%

0.54

• 1.87
• 0.82
• 1.07
• 1.33
• 0.51

TELECOMS Aspen 2018/09/12

• 14.8%

1.32 0.92

• 0.12
• 0.07

0.62 0.67 HEALTH CARE

SUMMARY

• 1. Factor investing is a simple concept.
• 2. Factor investing is already here!
• 3. SA market concentration is not a constraint for only factor managers.
• 4. A data-driven unemotional approach is essential
• 5. Specialists are needed to harvest and build factor-efficient portfolios.

ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

12