Smart beta and factor-based investing
Smart beta and factor-based strategies offer investment options that lie between active and passive investing
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We offer off-the-shelf and bespoke smart beta and factor-based strategies with global, regional and country-specific variations.
HSBC Global Asset Management has a long track record of partnering with clients to provide best in class off-the-shelf and bespoke smart beta strategies.
- Multi-factor strategies provide controlled exposure to multiple factors (Value, Quality, Low Risk, Small Size, Momentum) aiming for consistent out performance relative to a traditional index equivalent and with targeted tracking error. Through our proprietary risk models, we tailor our factor-based strategies to incorporate client-specific guidelines including bespoke tracking error levels, factor exposures and ESG constraints
- Fundamental strategies include our suite of Economic Scale Equity (ESE). Launched in June 2012, ESE strategies weigh companies by their economic footprint, aiming for better risk-adjusted returns relative to a market cap-weighted index. Our methodology was created “in house” by our quantitative research team
- Volatility focused strategies combine quantitative discipline and qualitative judgment. We capture quality companies based on attractive profitability and valuation profiles and construct a portfolio optimised for lower volatility. Proprietary fundamental research and integrated Environmental, Social and Governance (ESG) analysis are used to confirm stock volatility characteristics and whether company profitability levels can be sustained
Multi-factor equity strategies
Designed to combine Value, Quality, Momentum, Small Size, and Low Risk factors and provide consistent out performance against a market cap-weighted index with low tracking error.
Factor investing is based on the observation that stocks with certain characteristics (or more precisely, premia) have outperformed the broader market over time on a risk-adjusted basis. Allocating to factors gives investors transparent and cost effective access to these sources of returns, enabling them to better understand and manage underlying portfolio risks.
- A "pure" factor framework maximises exposure to the desired factors while minimising all other unintended exposures
- A multi-factor approach should be customisable to provide strategic and tactical exposures to desired factors with targeted tracking error and risk controls
The key elements of our factor investment process include quantitative stock selection, robust portfolio construction and consistent implementation with integrated risk management:
- Our bottom-up methodology combines factor scores at the stock level
- Our portfolio construction process optimises exposure to alpha signals in a transparent and consistent way
- We apply strict active limits at the sector, country and factor level to avoid taking unrewarded risks
- Pure factor framework provides minimal unintended risks and low correlations among factors
- We design and validate each factor from scratch. Metrics and fundamental data elements are carefully selected based on decades of experience in hands-on factor investing
- Investment approach is highly adaptable to implement customised portfolios based on client requirements
- We have robust implementation capabilities and a strong technology and risk modelling infrastructure
- Our global multi-factor strategy has a long and stable track record of 10+ years
Fundamental strategies – Economic Scale Equity (ESE)
Aim to capture equity beta and attain higher risk-adjusted returns relative to traditional indices.
- Cap-weighted indices can be inefficient and stock prices can be noisy relative to their fair value
- A weighting approach that captures a company’s economic activity (its contribution to gross national product (GNP)—or its “value-add") yields stable weights with low linkage to share prices
- We calculate each company’s “value-add” — the difference between its output (sales) and inputs (its purchases of goods and services from other businesses)
- A company’s weight is determined by its “value add” / sum of all company “value adds”
- Resultant factor exposures are generally tempered
- Only liquid names are included
- Systematic rebalancing leverages potential market mispricing while keeping turnover low
Company “value-add” amounts are disbursed to equity holders, debt holders, employees and the government.
- A theoretically sound and intuitive approach that breaks the link between index weight and market price, enabling superior diversification and better capture of the noise that influences market prices
- A proprietary methodology that is cost-efficient and transparent
- Pure play on rebalancing and traditional index inefficiency
- Limited style bias facilitates use as the core building block of an equity allocation
- A proven track record since 2012
Lower volatility strategies
Provide exposure to low beta, quality and value factors with higher risk-adjusted returns than their market cap index equivalents.
Lower volatility strategies can offer better risk-adjusted returns than a market cap index equivalent and their lower drawdown potential helps preserve capital in down markets.
- Our approach combines quantitative discipline and qualitative judgment
- We identify and rank quality stocks with attractive profitability and valuation profiles
- We then apply minimum variance optimisation to the top quartile of ranked stocks to create a low volatility portfolio
- The low volatility portfolio includes some less correlated, higher volatility names to reduce absolute risk
- Fundamental research focuses on confirming a stock’s volatility outlook and whether its profitability is sustainable
- Our fundamental research adds value within a disciplined framework, helping to avoid false signals. This is distinct from pure passive approaches and pure quantitative methods
- We include Environmental, Social and Governance (ESG) research in our process to confirm a stock’s volatility characteristics and whether its profitability levels are sustainable
- Our investment process sets us apart from more traditional low volatility approaches. We focus first on finding quality stocks (strong profitability and valuation) and then optimise for low volatility. This supports diversification and helps avoid crowded trades, sector concentration and interest rate sensitivity
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Where overseas investments are held the rate of currency exchange may also cause the value of such investments to fluctuate.