Article: Best Practices for Factor Change Analysis

Xiang Yu, James Carrington, Yannis Papacostas | June 22, 2021

How leading asset managers and investors instantly pinpoint the causes of factor exposure changes

In the past nine months, the investment industry has seen one of the biggest rotations in factors in nearly 10 years. Global economies continue to recover from the effects of the pandemic, driving investors to reposition in a sea of shifting tides. Now, they must be able to explain the causes of style drifts and the actions they took – quickly and accurately – and confidently justify their portfolio decisions.

However, active managers and investors face many challenges in their ability to achieve this goal. Now there is a better way. Increasingly, independent factor change analysis has become a game-changing, best-practice tool in asset managers’ and asset owners’ arsenal to pinpoint the root cause of changes instantly – ultimately providing objective clarity that drives confidence and stronger long-term relationships.

Key Challenges in Identifying Factor Exposure Changes

When investors and managers see changes in factor exposures of their portfolios over time, they need to investigate and understand what caused the changes. While the availability of a large universe of fund data lends itself well to factor analysis, many asset managers resort to downloading global fund data composed of thousands of securities into spreadsheets – without any efficient way to reduce unnecessary “noise” and effectively pinpoint deviations from stated mandates.

Analyzing drifts and changes for just one factor can take hours. Analyzing the entire portfolio and multiple factors cancan take days or weeks, making it difficult and time-consuming to verify and communicate precise information to end clients. In the meantime, the investment consultant or investor can lose faith and trust in that manager.

The Best Practice of Top Asset Managers and Investors

How are leading asset managers and investors solving these challenges? The use of factor change analysis is now the best practice for not only identifying relevant changes in factor exposures, but also instantly pinpointing what caused the changes. It allows managers and investors to visually explain and understand the complete story of what occurred.

Independent factor analysis lets managers uncover objective data and facts on why a portfolio’s factor exposures changed. Did the market move? Was the change due to active trading? Did the manager cause the change?

Factor change analysis answers these questions, allowing active managers and investors to quickly and easily understand the reasons behind a factor exposure change, whether intended or unintended. It combines the data and analytics needed to investigate and present the causes, revealing changes in the market, at the fund level, all the way down to the stock level.

Asset owners and their risk teams also need to be able to understand drifts and why they happen, as well as regularly review and assess their managers. With independent factor change analysis, they can use the same tool as asset managers to find the answers. When a change is detected in a portfolio, they can see, down to the security level, why the change occurred and the drivers of change on the portfolio over any period of time.

Raising the Bar in Active Management

As global economies ride the way of recovery, asset managers and investors need a fast, accurate and intuitive way to isolate drift and change. Going forward, the ability to swiftly and objectively identify and analyze drift and change will raise the bar on active management standards for portfolio insights, accuracy and confidence among asset managers and investors alike.

With independent factor change analysis, the ability to prove the cause of outcomes in an objective visualization in just seconds is invaluable. A complete, easy-to-understand, independent factor change analysis tool simplifies complex data in a dynamic way to investigate the change. It can give active managers and asset owners the power to dig deep into what really matters and compare to industry benchmarks – all in one place.


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