For professional investors only Global Equity Style Premia A unique approach to style-based investing
Global Equity Style Premia A smarter way to invest in equities; systematically accessing the returns of four proven investment styles in an efficient way. Our strategy: The strategy aims to consistently outperform the MSCI World Total Return Index, while maintaining a similar level of risk The strategy captures proven equity investment style premia, through a robust systematic process Rationale for style based approach supported by academia and empirical evidence Our long only approach provides exposure to four styles; value, momentum, low volatility and growth at a reasonable price () and efficiently combines them in a multi-style approach. What is an equity style? Traditionally, investors have structured their allocations around two main sources of return; alpha and index returns. Market capitalisation indices, however, are not the only way to consider broad equity market returns. Increasingly index providers are creating a new generation of indices that provide diversification to a market capitalisation approach. Styles are quantifiable characteristics of securities that determine the return and volatility of those securities. It has been shown academically that a significant amount of investment manager return can be explained by styles. These styles have been demonstrated to have persistent positive returns associated with them over time. We believe that by systematically investing in stocks which have attributes associated with these styles, we are able to deliver performance in excess of a market capitalisation benchmark in a variety of market conditions. Typical source of equity returns: Beta+Alpha Beta+Style+Alpha For illustrative purposes only Style premia What styles do we target within the strategy? We have carefully selected a combination of styles that have been recognised for positive returns, by academic research over a sustained period (low volatility, momentum, value and growth at a reasonable price ()). We believe that this combination of styles is an effective way to capture excess returns available in equity markets. Excessive pessimism about the prospects of dull companies and optimism about glamour companies leads to mispricing Under reaction to news and extrapolation of past trends leads to past winners continuing to win and past losers continuing to lose volatility Aversion to leverage and the lottery effect lead to low risk stocks performing better than expected to under traditional finance theory Growth at a reasonable price Stocks with good growth, moderate valuations and good quality financial statements represent the best of all worlds
Delivering diversification through our Styles approach While exploitation of styles alone is an attractive concept, using only the raw styles (e.g. book-to-price for value) may not be the best approach. What we need to consider is that the various styles can be driven by shared components. We seek exposure to the pure style, using systematic filters to identify Styles. For example A small Italian retailer may look cheap from its book-to-price ratio, but if all Italian stocks are cheap, does it really represent value? Before we can come to a conclusion, we need to remove the shared elements that contribute to the valuation to discover the Styles. From Styles...... to Styles volatility volatility Raw styles are attractive but not necessarily independent. This can lead to: er return characteristics er diversification benefits Our unique Styles approach: Isolates the desired style Aims to improve long-term return ers correlation between styles Greatly improves predictive power Over a number of years we have developed and refined a methodology that extracts the Styles. Our methodology removes the shared components from the raw variables, simultaneously, to come to an improved metric of the desired style. It is possible to create the desired style exposure and have a diversifying portfolio. Our unique Styles methodology lowers correlation between styles and reduces the overlap that causes stocks to appear in more than one style index. The following is an example, utilising true value style, of how we create our portfolios to neutralise other influencing styles: Example of Styles : Step one: We take a list of the stocks within the MSCI World Total Return Index and the book-to-price ratios, where a high value indicates a stock is cheap and a low value indicates a stock is expensive. Step two: We adjust the book-to-price ratios to remove the effect of other styles as well as country and sector and market effects. We now have a list of stocks in the MSCI World Total Return Index and their true book-to-price ratio. The true book-to-price ratio indicates the cheapness of a stock relative to other similar stocks. This is also how active managers like to compare stock they will buy a stock that is cheap relative to its peers. Step three: We create a portfolio which maximises the exposure to the book-to-price ratio. This value portfolio is now less likely to include stocks that have negative momentum for example.
Creating the optimum blend Our custom portfolio optimiser creates four style portfolios, each maximised to capture the desired Styles. These portfolios demonstrate a low level of correlation between each other and little overlap in stock names. The next step is to combine the portfolios, through an Equal Risk Contribution approach. Systematic and stock specific risk are controlled through the portfolio construction process, limiting undesired risk exposures such as size, sector and country. Global Equity Style Premia Style Allocation (historical simulation) 100% 80% 60% 40% 20% 0% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Volatility Source: BMO Global Asset Management, Factset, Bloomberg, January 1988 to 30 September 2016 historical simulations under realistic constraints to April 15, live data thereafter. The backtested data shown is for illustrative purposes only and does not represent actual results. Back-tested simulated performance (Raw Style vs. Style) volatility 1000 800 600 500 400 300 200 100 0 Return (pa) Volatility (annualised) Sharpe Ratio Raw value style 4.4% 12.5% 0.35 value style 5.6% 4.8% 1.16-20 Dec 87 Dec 88 Dec 89 Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Raw value style value style Source: BMO Global Asset Management, Factset, gross of fees. All data from January 1988 to 30 September 2016. The returns represent the outcome of buying the top 20% of stocks with each particular attribute and selling the bottom 20%, rebalanced monthly, and do not include any transaction costs. A logarithmic scale shows two equal percent changes plotted as the same vertical distance on the scale. The backtested performance shown is for illustrative purposes only and does not represent actual results. It is based on an analysis of past market data with the benefit of hindsight and it does not reflect the reinvestment of dividends, interest, capital gains, withholding taxes, the deductions of fees, commissions or any other expenses a client would have to pay. Actual results may significantly differ from the returns being presented. The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. Benefits of diversification low correlation between styles Volatility Volatility 1 Reducing absolute correlation between styles In this bar chart, we show how our refined individual Style exposures demonstrate lower correlations with other styles than their raw style counterparts do. 1 0.22 1-0.16-0.24 1-0.02-0.08 0.27 1-1 Raw Styles Volatility Styles Volatility Source: BMO Global Asset Management, Factset, Bloomberg, JPMorgan January 1988 to 30 September 2016, net of cost assumptions, net of dividend tax differential. Historical simulations till December 2013, live thereafter. Source: BMO Global Asset Management correlations of observed style returns. Data as of 30 September 2016.
Systematic equity expertise Having developed his first style strategy in 2003, Erik Rubingh has been leading our Systematic Strategies team since 2007. Extending and enhancing our capabilities over time the team has developed an innovative Styles approach that has been successfully employed within a range of strategies, both long and long / short. 2016 Managing style based strategies since 2003 2015 Team AUM over 3bn* 2003 Style strategy first developed by Erik Rubingh at ABP Investments 2007 Erik joined as Head of Systematic Equity. The core portfolio management team has been working together since 2007 2008 Launched regional versions of the strategy using the Style approach 2010 Launch of the global strategy utilising the Styles approach 2013 Launch of equity market neutral long/short strategy for F&C Diversified Growth Fund Launch of F&C Global Equity Market Neutral Fund with 10% volatility target Erik Rubingh, Head of Systematic Strategies Erik Rubingh is Head of the Systematic Strategies team. He joined the company in July 2007. Prior to joining us, Erik worked at ABP Investments (now APG Investments), first as Senior Portfolio Manager in the Global Quantitative Strategies Group and later as Head of that group. Erik graduated from Groningen University with an MSc in Econometrics. He is also a CFA charterholder. * BMO Global Asset Management, 30 September 2016
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