Smart Beta: Unlocking key drivers of return Manuela Sperandeo, Head of EII Specialist Sales EMEA March 2017 For professional clients / qualified investors only
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 EMEA Factor ETFs AuM in bn USD NNA 2016 in m USD 16.0 15.6 1,200 1,122 982 Risk on 14.0 4.6 700 763 782 663 694 525 802 96 12.0 10.0 8.0 6.0 7.5 1.3 10.4 2.4 4.2 5.0 200-300 311 Risk off 4.0 2.0 0.0 3.1 3.1 5.9 1.6 1.3 3.8 3.1 1.0 1.4 0.5 2012 2013 2014 2015 2016-800 -1,300-588 -400 Low Volatility Multi-Factor Single Factor Low Volatility Multi-Factor Single Factor Source: BlackRock ETP Landscape as of 30/12/2016 2
Cumulative Excess Returns vs. MSCI Europe 2016: The year in factors 6% 4% Market Low (11/02/16) Brexit +1 (24/06/16) US-Election +1 (09/11/16) +5% -5% +6% 2% 0% -2% -4% -6% -8% 01/2016 02/2016 03/2016 04/2016 05/2016 06/2016 07/2016 08/2016 09/2016 10/2016 11/2016 12/2016 MinVol Momentum Quality Size Value MSCI index methodology resources available at www.msci.com. MSCI Europe Momentum Index denoted as Momentum; MSCI Europe Mid-Cap Equal Weighted denoted as Size; MSCI Europe Enhanced Value Index denoted as Value; MSCI Europe Quality Sector Neutral Index denoted as Quality; MSCI Europe Minimum Volatility denoted as Min Vol. Index returns are for illustrative purposes. Index performance returns do not reflect management fees, transactions costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. This analysis contains back-tested index data. Data for time periods prior to the index inception date is hypothetical and is provided for informational purposes only to indicate historical performance had the index been available over the relevant time period. 3
What is a factor investor to do? Economic Regime Signals Factors allocated across 4 regimes: Expansion, slowdown, contraction, recovery Recent GDP growth, leading indicators to project GDP acceleration and deceleration Valuation Signals Bottom-up valuation of firms within each factor relative to historical average and to other factors Metrics: Cash flow to price, earnings to price Technical and Sentiment Signals Blend of approaches incl. bottom-up analysis of Momentum holdings and price trends to gauge market sentiment Metrics: Recent vs. historical factor price, Momentum factor holdings, dispersion in holdings within factors. Source BlackRock as of 30/12/2016. For illustrative purposes only. 4
Looking into 2017 Source: BlackRock as of December 30, 2016. This outlook applies to the named US factor indices only. Portfolio composition and signal outlook for other indices and other geographies may differ. Model inputs and factor outlook are subject to change. Reliance upon information in this material is at the sole discretion of the reader. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Outlook I subject to change without notice. There is no guarantee that any forecasts made will come to pass. US Min Vol is represented by MSCI USA Minimum Volatility Index, US Value by MSCI USA Enhanced Value Index, US Quality by MSCI USA Quality Sector Neutral Index, US Momentum by MSCI USA Momentum Index and US Size by MSCI USA Size Index 5
Case study I: Seeking the Right Factor Mix Step 1: Diagnosis Is your factor exposure the intended one? Earnings Yield Volatility 0.30 0.20 Momentum 0.10 Sentiment 0.00-0.10 Size -0.20-0.30 MidCap -0.40 Reversal Profitability Value Dividend Yield Liquidity Growth MSCI World Hypotetical Portfolio Source: BlackRock, Morningstar. Time horizon: July 2011 - August, 2016. For illustrative purposes only. 6
Excess Return (%) Case study I: Seeking the Right Factor Mix Step 2: Determine 1.8 1.6 Current + Factor Strategies Frontier 1.4 1.2 Current Frontier 1.0 0.8 0.6 0.4 0.2-0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 Tracking Error (%) Current Frontier Factor Strategies Frontier Hypotetical Portfolio 1.0% Tracking Error: Factor Strategies 1.5% Tracking Error: Current 1.5% Tracking Error: Factor Strategies 2% Tracking Error: Current 2% Tracking Error: Factor Strategies Source: BlackRock, Morningstar. Time horizon: July 2011 - August 2016 7
Case study I: Seeking the Right Factor Mix Design Earnings Yield Volatility 0.30 0.20 Momentum 0.10 Sentiment 0.00-0.10 Size -0.20-0.30 MidCap -0.40 Reversal Profitability Value Dividend Yield Liquidity Source: BlackRock, Morningstar. Time horizon: July 2011-August, 2016. For illustrative purposes only. Growth MSCI World 1.5%TE Smart Beta Hypotetical Portfolio 2.0%TE Smart Beta 8
Case II: Translating factor views into an investable model portfolio Annual Return (Jan 2000-Dec 2016) Risk (ex post) (Jan 2000-Dec 2016) 7.3% 18.9% 19.6% 3.4% Hypothetical Factor Rotation Strategy Backtest MSCI USA Index Hypothetical Factor Rotation Strategy Backtest MSCI USA Index Source BlackRock as of 30/12/2016. For illustrative purposes only. Source: BlackRock and MSCI. Data as of 30/12/16. The hypothetical backtested factor rotation strategy combines backtested index returns of the indices listed on slide 3. Index returns are for illustrative purposes. Index performance returns do not reflect management fees, transactions costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. This analysis contains back-tested index data. Performance is shown gross of fees. If fees were included, performance would be lower. Past performance is not indicative of future results. The value of an investment can fall as well as rise and you may not get back the original amount invested. There is a risk that the entire amount invested may be lost. Past performance is not a reliable indicator of future results. BlackRock makes no representations or warranties as to the accuracy or completeness of any past, estimated or simulated performance results contained herein, and further nothing contained herein shall be relied upon as a promise by, or representation by BlackRock whether as to past or future performance results. 9
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