Factor investing needs flexibility

To make the most of investing in factors such as high beta and low volatility, individuals should not limit themselves to just one element, a global fund manager has said.

At the recent S&P Dow Jones Indices Annual Australia ETF Masterclass 2018 in Sydney, Lunt Capital Management chief operating officer Ryan Hessenthaler revealed in the United States many people have implemented this approach to factor investing, in many cases pertaining to low volatility, with less-than-satisfactory results.

“What do you do when low volatility doesn’t perform so well or high beta for that matter?” Hessenthaler said.

“[Last year] high beta and low volatility both underperformed the S&P 500, so how do you help a client work through that?”

According to Hessenthaler, Lunt Capital Management considered this situation and has come up with a solution to the problem.

“What we do is tactically rotate between these factors. We say we can own high beta or we can own low volatility, so let’s develop a mathematical, rules-based objective approach to switch between these and see if we can capture the best characteristics of both and avoid when they’re not in favour as well,” he said.

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