Article: Factor Analysis: Why Wealth Managers Should Use it for Client Portfolio Reviews 

Hermann Lara | October 6, 2022

As the strains of global inflation, tightening monetary policy, and earnings pressure on equities continue to move portfolios downward and sideways, advisors have their cup full when it comes to accountability. They own the dialogue when it comes to rationalizing long-term strategies, helping clients navigate life events, and easing their clients’ concerns regarding their financial goals.    

Their clients today are well informed. They have access to sophisticated tools online. Most concerning, they’re bombarded with endless narratives regarding their wealth, including everything from crypto to single stock ETFs. It’s important that advisors realize this is the case.   

We would argue it’s even more important that client-facing wealth managers have powerful tools to help sculpt the story they are sharing and seeking to reinforce consistently. Wealth advisors and investment managers need more than drift analysis, tax loss harvesting, and long-term trend charts to help keep their clients on course.   

The Portfolio Alpha Challenge 

If you look at asset class performance through the end of August this year, you’ll find that capturing excess return is not easy unless you’re willing to overexpose portfolios to risk, liquidity, geographical and volatility metrics, among a few. As of August 31, 2022, the S&P 500 had returned -16.14%, S&P 500 Value -8.84%, and S&P 500 Growth -25.09%, while US Bond Aggregates have returned -10.8%. In Europe, stock returns hover in a similar space at -23.14%. Challenging to say no more. 

Two sectors where advisors could have captured value are commodities which returned 23.59%, and energy which yielded 12.84%. In pointing out these two positive sectors, you cannot avoid the volatility those sectors experienced this summer and the excessive exposure to the geo-political risk inherent in those sectors. The wide range of returns creates complexity as you review portfolios with clients and work to ease concerns. 

Consider Factor Analysis 

Are you taking factor analysis into account when reviewing your portfolios? Equity factors help explain why certain stocks tend to outperform the market and help identify which stocks are most likely to do so. Therefore, not doing factor analysis could result in a missed opportunity to understand the underlying business metrics of a company and the core drivers of portfolio performance. In actuality, you may be doing this from a high-level perspective. However, as we all know, repeatable methods and evidence win.    

This year alone, more than a dozen key market factors outperformed the overall down market. Positive Cash Flow Yield, which considers earnings yield but also leverages business metrics such as depreciation and amortization, aims to capture the cash flow health of a company. On average, companies with Positive Cash Flow Yield, returned 6.2% through the end of the summer.   Earnings Growth Stability, Dividend Yield, and Return on Equity are similar outperformers. 

Reviewing such criteria should not be limited to research analysts and portfolio managers alone. With the right data toolset, these metrics can be pinned against SMA strategies, fund in fund reviews, and ETF constructed portfolios. 

Drilling Down and Digging In 

When singing in the choir, you need to know who your strongest alto, soprano, tenor, and bass voices are. Factor analysis toolsets can amplify your holdings level data. They can help you understand what equities drove the shifts in outperforming factors and allow you to drill deeper than the standard fund tear sheet when reviewing. You may not be getting this solely from your back-office portfolio management system or by reviewing custodial statements. True value can be unpacked by using a system that not only unfolds what’s in a fund or strategy but can also compare, automate, and visualize how those constituents’ function in their respective sections. This level of detail can help harmonize your discussions. 

Automate, Integrate and Visualize

Successful firms lead with technology and better serve their clients using all types of client and investment-focused tools. APIs, custom dashboards, scheduled uploads and file transfers, client portals, and CRM rule the landscape.   

When it comes to investment research, living in spreadsheets and proprietary databases alone slows the processing and digestion of critical data.   Seek providers that can help you automate the intake of your holdings. Seek partners that will understand your concerns and exceptions when automation requires attention. Once that data is in your toolset, make sure that the integration of your portfolios can be coordinated on a top-down and bottom-up basis. Most importantly, lean on your data visually. There is no reason to hunt and query for data. It should be at the forefront when you queue up your request. That’s the measure of quality today. 

As a trusted advisor or fiduciary, your expertise and relationship with your clients will help you build on the integrity of your process. The right toolset, with independent validation of your investment style through factor analysis, will help you easily substantiate your funds and investment advice.  

Contact us to learn how Style Analytics solutions can help you with factor analysis and visualization of your performance.  


The material presented in this document is an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or any issuer or security or similar.

This document contains general information only, does not consider an individual’s financial circumstances and should not be relied upon for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should always be given to consult a Financial Advisor before making an investment decision. 

Investment Metrics, a Confluence company, does not provide investment advice and nothing in this document should be considered any form of advice. Investment Metrics accepts no liability whatsoever for any information provided or inferred in this document.


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