Real Application of Factor Investing in SA Ann Sebastian STANLIB - PowerPoint PPT Presentation

Real Application of Factor Investing in SA Ann Sebastian STANLIB

FACTOR INVESTING WHAT IS IT? A factor is a broad, persistent driver of long-term returns • SA specific factors are Growth, Quality, Momentum, Analyst Sentiment and Valuation • Investment decisions are based on how well companies score on these factors • WHY SHOULD YOU CARE? Norwegian Pension Fund – the turning point for factor investing from theory to reality. • Lower fee structure compared to traditional active managers for systematic factor exposure • Index beating returns in the long term • 2 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

IS THE SA MARKET TOO CONCENTRATED FOR FACTOR INVESTING? Concentrated equity markets are the rule, rather than the exception: Total of Top 10 by Market Cap Weight In Index 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: S&P Indices & STANLIB Index Investments, May 2018 3 ACTUARI AL SOCI E TY 2019 CONV E NTI ON | 22 - 23 OCTOBER 2019

IS THE SA MARKET TOO CONCENTRATED FOR FACTOR INVESTING? INVESTING? Split of AUM in SA by Index Cognisance This is an issue for all active managers in SA: 1. 64% of AUM is index cognisant 32% Average realised tracking error in 2. retirement active equity space is 3%* *Alexander Forbes Survey, benchmark cognisant category July 2019 32% Retail Index Cognisant Instituitional Index Cognisant Retail Non Index Cognisant Instituitional Non Index Cognisant Source: Morningstar and Alexander Forbes Survey July 2019 4 ACTUARI AL SOCI E TY 2019 CONV E NTI ON | 22 - 23 OCTOBER 2019

CAN YOU BUILD AN INDEX-COGNISANT FACTOR PORTFOLIO IN SA? STANLIB MULTI-FACTOR FUND Performance vs Benchmark 3 Months 6 Months 1 Yr. 2 Yr. 3 Yr. Fund 4.13% 9.20% 3.33% 7.09% 4.80% Benchmark (Capped SWIX) 2.90% 6.86% 1.11% 5.17% 3.51% Relative 1.23% 2.33% 2.22% 1.92% 1.27% Source: STANLIB, StatPro, June 2019 Risk 1 Yr. 2 Yr. 3 Yr. Tracking Error 1.18% 1.20% 1.56% Source: STANLIB, StatPro, June 2019 Ranking vs Peers 3 Months 6 Months 1 Yr. 3 Yr. 1 st out of 40 funds 2 nd out of 40 funds 5 th out of 40 funds 5 th out of 29 funds Performance Ranking Source: Alexander Forbes Survey June 2019 5 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

HOW DO YOU DETERMINE THE ALLOCATION TO FACTORS? 4. What is the future macro phase? How cheap is the factor? 4. 1. 1. Valuation Macro 3. 2. Dispersion Trend 3. How different are companies? 2. Has the factor been trending? 6 ACTUARI AL SOCI E TY 2019 CONV E NTI ON | 22 - 23 OCTOBER 2019

HOW DO YOU DETERMINE THE ALLOCATION TO FACTORS? 4. What is the future macro phase? How cheap is the factor? 4. 1. 1. Valuation Macro 3. 2. Dispersion Trend 3. How different are companies? 2. Has the factor been trending? 7 ACTUARI AL SOCI E TY 2019 CONV E NTI ON | 22 - 23 OCTOBER 2019

WHAT IS THE FUTURE MACRO PHASE? Proprietary Macro Indicator which utilises Machine Learning and Macroeconomic data to predict future macro phase: Macro Slowdown Expansion Contraction Recovery 1,50 1,00 Slowdown 2018 Quality, +26% Rest of Factors, +6% 0,50 Macro Phase Score Expansion 2017 0,00 Momentum, +18% Rest of Factors, +9% -0,50 Recovery 2016 -1,00 Cyclical Value, +40% Defensive Value, +4% Rest of Factors, -18% -1,50 -2,00 -2,50 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Source: STANLIB Index Investments 8 ACTUARI AL SOCI E TY 2019 CONV E NTI ON | 22 - 23 OCTOBER 2019

CURRENT FACTOR ALLOCATION IN STANLIB MULTI-FACTOR FUND? Defensive Value; 10% Sentiment; 12% Quality; 37% Momentum; 13% Growth; 28% Quality Growth Momentum Sentiment Defensive Value Source: STANLIB Index Investments 9 ACTUARI AL SOCI E TY 2019 CONV E NTI ON | 22 - 23 OCTOBER 2019

CURRENT TOP PICKS BY MULTI-FACTOR? FACTOR SCORES FOR TOP PICKS Company Valuation (10%) Analyst Sentiment (12%) Price Momentum (13%) Quality (37%) Growth (28%) MULTI-FACTOR SECTOR Kumba 0.80 0.90 1.40 2.00 0.30 1.20 GENERAL MINER Capitec -0.10 0.30 1.80 0.90 1.80 1.10 BANKS Santam 0.30 0.20 -0.20 1.50 1.50 1.00 INSURANCE Clicks -1.50 1.40 1.50 0.60 1.20 0.80 DISC. RETAILER Anglo American Platinum 0.40 0.20 -0.40 1.50 0.80 0.80 PLATINUM Anglo Gold -0.30 -0.20 0.80 1.10 1.00 0.70 GOLD MINING Reunert 0.70 -0.90 0.10 1.40 0.70 0.70 INDUSTRIALS Astral Foods -0.30 -1.20 -1.10 1.40 0.90 0.50 CONSUMER GOODS Source: STANLIB Index Investments 10 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

IMPORTANCE OF UTILISING A DATA-DRIVEN APPROACH FACTOR SCORES 6 MONTHS PRIOR TO EACH STOCK’S COLLAPSE Date of Major Company % Price Change Valuation Analyst Sentiment Price Momentum Quality Growth MULTI-FACTOR SECTOR Collapse Brait 2018/08/29 -19.4% -1.3 -2.04 -1.76 -1.79 -1.78 -1.73 INVESTMENTS Steinhoff 2017/12/05 -11.1% -1.54 -0.94 -1.69 -0.64 -0.5 -1.12 RAND HEDGE Sasol 2019/05/21 -13.0% -1.77 -0.44 -1.19 -0.75 -0.84 -0.90 GENERAL MINER EOH 2017/12/05 -61.4% -0.58 -0.22 -1.85 -0.01 0.36 -0.62 TELECOMS Tongaat 2019/02/21 -20.4% -0.01 -0.09 -0.55 -0.84 -0.51 -0.54 INDUSTRIALS MTN 2018/11/12 -10.0% 0.54 -1.87 -0.82 -1.07 -1.33 -0.51 TELECOMS Aspen 2018/09/12 -14.8% 1.32 0.92 -0.12 -0.07 0.62 0.67 HEALTH CARE Source: STANLIB Index Investments 11 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019

SUMMARY 1. Factor investing is a simple concept. 2. Factor investing is already here! 3. SA market concentration is not a constraint for only factor managers. 4. A data-driven unemotional approach is essential 5. Specialists are needed to harvest and build factor-efficient portfolios. 12 ACTUARI AL SOCI ETY 2019 CONV ENTI ON | 22 - 23 OCTOBER 2019