Article: How Aberdeen Standard and Pictet Wealth Management Use Factor Analysis for Portfolio Construction and Manager Research

Damian Handzy | July 20, 2021

Aberdeen Standard’s Justin Jones, Senior Investment Manager, and Pictet Wealth Management’s Yannick Bigeard, Head of Portfolio Structuring, recently joined our Head of Research, Damian Handzy, on a webinar to discuss how they use factor analysis to strengthen portfolio analysis, identify exposures in portfolio construction, research funds, and perform manager due diligence.

The conversation focused on several key points:

  • The role and application of factor analysis in the investment process
  • The importance of style stability of a manager versus style drift to capture alpha
  • Industry adoption and frequency of factor analysis
  • Technologies and tools for factor analysis
  • Reaction to the recent Growth-to-Value rotation
  • How ESG is incorporated into factor analysis

The following overview is based on a webinar attended by approximately 100 professionals on June 17, 2021.

The role and application of factor analysis in the investment process 

Both Justin and Yannick, as well as 71% of our webinar attendees, believe the use of factors has increased in popularity over the past few years. 

Yannick began using factors when he joined Pictet in 2007 and today believes it provides his firm with a huge edge and value-add across its investment process. Watching factors at the strategic asset allocation level, the firm looks for factor exposures that deliver alpha. At the tactical level, it also tilts its factor exposures to manage risk.

With the plethora of products emerging, Aberdeen targets and exploits specific factors within an investment strategy and at the individual manager level. Typically employing a mix of manager styles within a blended portfolio approach, the firm looks to control risk from a style perspective, often running its portfolios as generally balanced, with the ability to lean in and out of a style as needed. Factor analysis helps analyze a manager’s portfolio to ensure alignment with their prescribed process.

The importance of style stability of a manager versus style drift to capture alpha

When it comes to evaluating managers, the stability of their factor style is a top priority. Controlling which factors to pursue at the macro level is imperative. In addition, ensuring managers focus on their areas of expertise within a particular set of factors is important to decide on allocation for each manager.

A cornerstone of Aberdeen’s research process is aggregating at least five years of monthly holdings data, if not the entire tenure of that manager, before even considering meeting with a manager. Using tools like our Portfolio Analyzer, Aberdeen can understand a manager’s current exposure profile, the effects of factor drift and exposures, the evolution of its factor exposures over time. Using Style Analytics’ Peer Insights helps the firm analyze manager performance and exposure relative to peers, or similarly, compare philosophical approaches of other managers. 

Industry adoption of factor analysis

Sixty percent of our webinar attendees said they are fully-versed or long-time users of factor analysis; not one attendee said they had no experience with, or were not considering, factors.

Managers are clearly more aware of factor exposures and factor risks, and have begun using factor analysis when discussing their portfolio philosophy with institutional investors. Any absence of style positioning would likely spur more questions about the manager’s risk management process.

Although the centrality of factors in the investment process is not required for every asset manager, the expectation is that managers remain aware of style consequences throughout the investment process, risk management implications, and any adverse concentration to a style in specific market conditions. 

Frequency of factor analysis

Monitoring market news on a daily or weekly basis through the factor exposure lens, one can clearly see their impact on different equity sectors, styles and portfolios. 

As a 15-year user of Style Analytics, Aberdeen places a great deal of stock on latency of data and active exposure, facilitating a more rapid transfer of a manager’s holdings of data at the end of each month, and allowing the firm to get its analysis quickly in the following month. In addition to factors, the firm tracks information from a myriad of sources to build up a “research mosaic,” providing insight into the fund from multiple angles including its positioning at any point in time and potential risk impacts.

For Pictet, factor timing is one of the key alpha levers of its asset allocation process. Therefore, the firm looks for niche asset managers that remain invested in their specific styles rather than those that may switch styles as market conditions change.

Technologies and tools for factor analysis

First and foremost, Pictet uses Style Analytics tools for equities or any equity part of its portfolio, complementing them with proprietary and external tools for running the asset mandate, as well as input from its quantitative research team. By collecting and consolidating all this information, the firm becomes comfortable with the factor exposure related to the scenario it will design for the near future.

For Aberdeen, the combination of data, analysis, and manager relationships are key to researching and building portfolios. The firm uses many tools including a scenario generator to back-test and stress-test portfolios. In addition, the firm relies on independent risk teams, a large internal APT team, and a number of returns-based risk measures. Especially important are the qualitative aspects of its process including interactions with managers.

Whenever their portfolio factor exposures change, Pictet wants to know exactly why that change happened. The firm uses DeltaZoom™, our new factor decomposition module, to determine if factor exposure changes are caused by deliberate trading by the portfolio manager, or by a passive benchmark or market shift that was out of the portfolio manager’s control. The tool’s ability to disaggregate a manager’s deliberate change versus index change is extremely valuable and leads to more meaningful conversations with the manager. In short, DeltaZoom allows Pictet to ask more probing questions. 

Aberdeen uses another of our recently added modules, Similyzer™, to evaluate manager peers that have similar philosophies and similar factor tilts. Similyzer allows a firm to identify funds that have quantitatively similar factor exposures to a target fund. Aberdeen uses this module to isolate funds that run the same philosophy, are stylistically similar to each other, and have the same factor bias. The firm then uses it to isolate a group of similar funds, create a custom peer group with those managers to compare with its target manager, and observe behaviors over time.

Both of our guests underscored the need to understand the effects of blending managers and exposures together to assess total portfolio risk and all the style tilts in that portfolio aligned with expectations and the prescribed strategic direction.

Reaction to the recent Growth-to-Value rotation

Achieving balanced factor exposures seems to be the dominant strategy to maintaining alignment during factor rotations.

For example, Aberdeen’s style exposure is not significantly pointed towards Growth or Value, which has provided stability throughout the rotation. Aberdeen continues to maintain that balance in the portfolio, leaning in and out of those exposures as needed to maintain alignment.

Pictet’s recent work in Quality and mitigating the Quality-Growth bias seemed to pay off during the Growth-to-Value rotation, which has favored those with a Quality tilt. More recently, favoring Value and Size exposure and adjusting the portfolio accordingly has enabled the firm to achieve more balanced factor exposures. 

With a strong expectation for inflation, a Value rally is expected to last a while longer. However, there is a compelling argument, with rates going up, for Growth to reassert its dominance in the second half of this year. The question of when or how to apply that into client portfolios remains to be seen. 

How ESG is incorporated into factor analysis

ESG is clearly gaining greater significance in terms of overtly ESG tilted portfolios, while more non-ESG-specific portfolios continue to evolve approaches and analysis. 

In addition to Aberdeen’s view of the ESG Style Skyline™ providing insights into the different mix of ESG factors, the firm also augments Style data with its internal team which conducts hands-on research.

For Pictet, ESG is becoming a more important risk factor in explaining returns and understanding portfolio behavior. His firm uses the Style Skyline to investigate whether or not ESG provides a risk premium and to see the difference between the returns posted by the first quartile and the bottom quartile, along with the any carbon premium that may exist.


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