Financial Planning
Financial advisers weigh in on factor investing

No longer the domain of institutional investors, factor investing has become ubiquitous in financial advisers' investment strategies - and many do not recognise its influence.

Main Street Financial Solutions principal and private client adviser Charles Badenach says most investment approaches use a version of factor investing whether they acknowledge this or not.

Understanding how factors work and interact with each other enables asset consultants or fund managers to better capture their potential for excess return and reduced risk, he said.

Factor investing, which originated about 60 years ago, uses quantifiable attributes of a security or macroeconomic exposures to build portfolios.

It's a widespread strategy in equities, but less common in other asset classes such as fixed income.

The most popular factors are value, size, low volatility, quality and momentum. Interest rates, inflation, political issues and foreign exchange are some examples of macroeconomic factors.

Wealth Planning Partners director Amanda Cassar does not target exposures to a single factor or has the clientele and time to employ a multi-factor strategy.

"I understand that factor-based investing can be more transparent than traditional active investing and at a lower cost, and it can also follow a particular index; it also requires time and exposes you to different risks."

While Cassar is a fan of low-cost, diversified index portfolios for many of her clients, she mostly works with mums and dad investors.

Many of her clients don't engage with their super until they're older, or have a lot left over to invest personally in a more sophisticated manner.

"To be honest, I've never been approached by a client who has ever asked me to include factor investing in their portfolio," she said.

What is happening in the financial advice space now, Badenach said, is that advice businesses are increasingly forming relationships with asset consultants to help them build investment portfolios within defined parameters that suit their client base.

"The days of every individual adviser developing their own unique investment approach for every individual client are numbered - if not extinct already."

Financial planning group Shadforth advocates factoring investing strategies - but calls it "evidenced-based investing."

Shadforth private client adviser Sally Huynh said it is the most efficient, effective and robust approach that delivers the greatest benefit to her clients.

Furthermore, it reduces costs, minimises unnecessary trading and tax, and implements a disciplined and well-diversified portfolio, she added.

"If there is a better approach that has stood the test of time, we'd like to see the evidence."

Read more about factoring investing in our latest special feature.

Read more: Amanda CassarCharles BadenachSally Huynh
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