Multi-Factor Models: A Candid Discussion October 20th, 2015
North Toronto Exchange Traded Forum
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Today’s Panelists
Mike Newton
Michael Nairne
Barry Gordon
Director, Wealth Management & Portfolio Manager
President & Chief Investment Officer
President & CEO
Tacita Capital Inc.
ScotiaMcLeod
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First Asset
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What Experts are Saying 1. “The consistent outperformance of smart-beta funds in general confirms for me that yet again, smarter is usually — dare I say, always – better.”- Nicolas Vardy 2. “In a multifactor approach, when one factor is experiencing risk, another factor could be doing really well. So, in the short term, you’re going to get differences in performances. But the multibeta approach means you get much smaller differences on a year-to-year basis.” – Eric Shirbini
3. “Multi-factor allocations lead to pronounced improvements in risk-adjusted returns when investors combine factors that have low correlation with each other” – Noel Amenc, Felix Goltz, Ashish Lodd Sources: 1. “Why ‘Smarter’ is Always Better”. May 5, 2015. 2. “Under the Hood with Multifactor ETFs”. May 8, 2015. 3. The Journal of Portfolio Management. Summer 2014
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Michael S. Newton CIM®, FCSI® Director, Wealth Management & Portfolio Manager
MULTI-FACTOR MODELS - AN EXCITING DEVELOPMENT IN PORTFOLIO CONSTRUCTION
October 20, 2015
The Dawn of a New Era
Source: Fama, E. F.; French, K. R. (1993). "Common risk factors in the returns on stocks and bonds". Journal of Financial Economics
Factors Keep on Arriving
Source: Fama, Eugene F. and French, Kenneth R., A Five-Factor Asset Pricing Model (September 2014). Fama-Miller Working Paper. Available at SSRN: http://ssrn.com/abstract=2287202 or http://dx.doi.org/10.2139/ssrn.2287202
Changing the Face of Portfolio Construction
Source: Deploying Multi-Factor Index Allocations in Institutional Portfolios, MSCI Research Insight, December 2013
Implementing Factor Strategies: Managing Volatility, Risk & Return Barry Gordon, President & CEO, First Asset
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Factor-based Strategies
Combines the benefits of active and passive management Cost-effective, transparent, rules-based ways to capture factors. Factor-based Indexes
Market Return
Transparent & Cost-Effective
Cap-weighted Indexes
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Active Returns
Active Value Add
Active Management
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Factors Add Value *CAD Hedged* 90,000 80,000
$73,468
70,000 60,000
$47,779
50,000 40,000
$32,005
30,000
$27,393 $22,052
20,000 10,000 0 12/2001 12/2002 12/2003 12/2004 12/2005 12/2006 12/2007 12/2008 12/2009 12/2010 12/2011 12/2012 12/2013 12/2014 Morningstar® US Target Value Index Morningstar® US Target Dividend Index S&P 500 Index
Morningstar® US Target Momentum Index MSCI USA Risk Weighted Top 150 Index
Risk Metrics Up Capture
Down Capture
Std Dev
Sharpe Ratio
Sortino Ratio
Morningstar® US Target Value IndexSM
141.45
102.22
19.12
0.82
1.28
Morningstar® US Target Momentum IndexSM
130.13
106.00
19.30
0.60
0.91
Morningstar® US Target Dividend IndexSM
93.86
76.02
12.91
0.52
0.77
MSCI USA Risk Weighted Top 150 Index
81.80
57.21
11.27
0.53
0.72
S&P 500 Index
100.00
100.00
14.58
0.26
0.36
Source: Morningstar Direct. All Indexes are CAD Hedged. As at September 30, 2015.
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Diversifying Factor Exposure – US
Source: Morningstar Direct.
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First Asset Core US Equity ETF (CES) *CAD HEDGED* 50,000
$42,920
45,000 40,000 35,000 30,000
$22,379
25,000 20,000 15,000 10,000 5,000 0 01/2002
01/2003
01/2004
01/2005
01/2006
01/2007
01/2008
Core US Equity Model (CAD Hedged)
01/2009
01/2010
01/2011
01/2012
01/2013
01/2014
01/2015
S&P 500 Index (CAD Hedged)
Performance (%)
Risk Metrics
1-Year
3-Year
5-Year
10-Year
Up Capture
Down Capture
Std Dev
Sharpe Ratio
Sortino Ratio
Core US Equity Model
3.32
15.60
15.39
8.87
112.70
88.62
14.86
0.68
1.04
Benchmark
-0.61
12.41
13.34
6.80
100.00
100.00
14.62
0.27
0.38
Source: Morningstar Direct. As at September 30, 2015.
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Panel Discussion
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Disclaimer This presentation is based on information supplied provided by MSCI or that is publicly available information. Tacita makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to inform any parties when opinions, estimates or information in Tacita research changes. Hypothetical results including any returns calculated on hypothetical portfolios comprised of indexes or specific investments are based on historical performance of market indexes or specific investments during the period illustrated. Market indexes are not directly investable. These returns do not represent actual trading, but were achieved using back-testing with the benefit of hindsight and are presented solely for information purposes. These results may not reflect the impact material economic and market factors might have had on Tacita’s analysis and decision-making if Tacita had actually been managing the assets at that time. In addition, the information presented is based, in part, on hypothetical assumptions. Certain of the assumptions have been made for modeling purposes and may not have been realized in the actual management of accounts. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions may have a material impact on the returns presented. Readers should not view this material as representative of any particular client’s experience or assume that they will have an investment experience similar to the returns shown. Data may be presented without a management fee and expense deduction in certain cases. Actual fees and expenses would be incurred in the management of a portfolio. Past performance is no indication of future results. Accordingly, any hypothetical portfolio’s returns are not necessarily indicative of the returns that any client would have achieved. All investments involve risk including loss of principal. The value of and income from investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized and it is possible the variation may be material. Management fees and expenses are associated with investing.
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Disclaimer This communication is confidential and for the exclusive use of registered dealers and their representatives. The contents may not be reproduced or distributed to any clients or potential clients of such dealers or to the public generally or to the press. Canadian securities legislation, including National Instrument 81-102 Mutual Funds, prohibits any such distribution. This communication is not intended to be a sales communication within the meaning of that Instrument and accordingly has not been designed to comply with the requirements of that Instrument relating to sales communications. Returns of an index do not represent the Fund’s returns and do not include any costs of investing. An investor cannot invest directly in an index. All performance data for all indices assumes the reinvestment of all distributions. Morningstar and MSCI index performance data results prior to December 26, 2013, for the MSCI USA Risk Weighted Top 150 Index, and prior to September 12, 2013 for the Morningstar US Target Momentum Index and Morningstar US Target Value Index; and prior to February 6, 2012, for the Morningstar Canada Target Value Index, Morningstar Canada Target Momentum Index, Morningstar Canada Target Dividend Index, Morningstar US Target Dividend Index are hypothetical but are calculated using the same methodology that has been in use by the index provider since the index was first published. Information regarding the Morningstar and MSCI indexes, including the applicable index methodology, is available at http://indexes.morningstar.com and http://MSCI.com/products/indices. As a result of the risks and limitations inherent in hypothetical performance data, hypothetical results may differ from actual index performance. The ETF Funds are managed by First Asset Investment Management Inc. Morningstar® is a trademark of Morningstar, Inc. and has been licensed for use for certain purposes by First Asset Investment Management Inc. First Asset ETFs are not sponsored, endorsed, sold or promoted by Morningstar or any of its affiliates (collectively, “Morningstar”), and Morningstar makes no representation regarding the advisability of investing in First Asset ETFs. MSCI is a trademark of MSCI Inc. The MSCI indexes have been licensed for use for certain purposes by First Asset. The funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities or any index on which such funds or securities are based. The prospectus of the funds contains a more detailed description of the limited relationship MSCI has with First Asset and any related funds. Important information about each First Asset ETF Fund is contained in its respective prospectus. Individuals should seek the advice of professionals, as appropriate, prior to investing. These investments may not be suitable for all investors. Some conditions apply. Copies of the prospectus may be obtained from your Investment Advisor, First Asset or at www.sedar.com Commissions, trailing commissions, management fees and expenses all may be associated with ETF investments. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. First Asset ETFs are managed by First Asset Investment Management Inc.
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