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State Street Global Advisors
A stock investment strategy that focuses on factor correlation

Pension investment that suppressed the lower price

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From the end of FY2019 to FY2020, the asset management market was greatly shaken by the spread of the new corona infection, and this year's pension asset management has been forced to steer extremely difficult. However, the latter half of 2020 is approaching, and it may be time for the pension fund to reconsider its investment policy for the rest of this year and for 2021 and beyond.
With this awareness in mind, on Wednesday, October 7, 2020, a conference entitled "Exploring Measures for Managing Pension Fund Assets" will be held for institutional investors such as pension funds, sponsored by Edit and supervised by Marketmakers. Was done. Here are two lectures given by State Street Global Advisors, mainly on the ideal way of investing in stocks.

講演者:横谷 宏史

運用部 マネージング・ディレクター



Stock market that incorporates "recovery expectations"

Although the stock market fell sharply under the corona shock, it continued to recover after April 2020, and in the summer it almost recovered to the level before the corona shock. The recovery speed is exceptionally fast compared to past stock market crises such as the collapse of the IT bubble (2000) and the Lehman shock (2008). The background to this was that the corona shock occurred at the "early stage of recovery" when the economic cycle of the semiconductor market called the silicon cycle had bottomed out and business sentiment began to improve globally. Bold monetary / fiscal policy has been successful. The corona shock had a major impact on the real economy, but the swift and bold policy invocation stopped the financial crisis, raising expectations that the economic recovery could be expected relatively quickly if the shock were alleviated. However, for now, what is supporting the market recovery is not the "recovery" of the economy and corporate profits, but the "expectation for recovery". Looking at the price-earnings ratio (PER) level, the current stock price cannot be justified by the 2020 earnings outlook, and it is factored in in anticipation of the V-shaped recovery of corporate earnings from 2021 to 2022.

When looking at the stock market for the time being, I would like to mention the so-called "with corona" such as the US presidential election, the whereabouts of US-China relations, and the high-tech stocks that drove the rise in the summer market. The future stock market can be viewed basically optimistically from the perspective of the business cycle, with the support of financial / fiscal policy, but there is a risk that these macro themes will change the market trend. I want to be careful about.

Differences in "low volatility" and "quality" characteristics

Given this outlook, for immediate equity investment, it is important to basically maintain equity investment exposure and benefit from equity returns while preparing for downside risks.

Considering that it is necessary to pay particular attention to macro themes, we would like to curb downward risk by utilizing factor investment that matches the market outlook, rather than individual stock selection.
Well-known factor investments are those that pursue excess returns such as "growth," "value," "small size," and "emerging," and those that suppress lower prices such as "low volatility" and "quality."

Exhibit 1 shows the performance characteristics of each factor. For example, “small” and “emerging” have relatively high risks, but returns tend to increase when the market price rises. In terms of downside restraint factors, "low volatility" has an extremely strong downside restraint effect by taking some risk to the entire market, while "quality" has a downside restraint effect and returns that exceed the market even in a rising market. You can see that it is raising.

[Chart 1] Performance characteristics of factor investment

Earnings and risks are all annualized
As of the end of September 2020, each factor is MSCI World Factor Index Source: Created SSGA from data from MSCI and Bloomberg

Excess earnings pursuit factor index suggests distortion

Next, Chart 2 shows the relative overvalue / undervalue of each factor with respect to the past level. While the factors of pursuing excess profits are conspicuously overpriced for "growth" and undervalued for "value", the feeling of overpriced and undervalued is not so noticeable for the lower price restraint type.

[Chart 2] Level of factor index

The score indicates how many standard deviations the level of each factor index deviates from the average of the calculation period as of the end of September 2020. The calculation period is from January 2001 to September 2020, and only the quality is January 2013. ~ September 2020
As of the end of September 2020, each factor is MSCI World Factor Index Source: Created SSGA from data from MSCI and Bloomberg

In this way, the excess profit pursuit type factor may have a distorted valuation at the moment, and it is not recommended to actively utilize it. It seems that individual stock selection is effective for excess profit strategy, not factor.

On the other hand, we would like to actively utilize factor investment to curb lower prices. Especially when the main scenario is optimistic, that is, when stock prices can be expected to rise, in addition to "low volatility", "quality" that can cope with rising markets to some extent should be utilized well. Specific factor investment strategies will be discussed in detail in the following sessions.

Multi-factor low-risk equity investment

A typical low-risk strategy for equity investment is the Minimum Volatility (MV) strategy. While the MV strategy can be expected to have a high downside restraint effect by controlling the total risk of the portfolio, it tends to be subordinated to the market capitalization index when the stock price rises due to its low beta characteristics. Exhibit 1 shows the excess return of the MSCI World Minimum Variance Index to MSCI World for the rising and falling months of MSCI World, which outperformed MSCI World by about 16% in the falling months, while the same in the rising months. It has underperformed to some extent, and the weakness of market follow-up in the rising phase is remarkable.

Factors such as value, size, momentum, low volatility, and quality are typical for equity investment, but the former three factors are generally classified as business cycle factors and the latter two factors are classified as defensive factors because of their effectiveness in the economic cycle. The MV strategy can be thought of as a single-factor investment for low volatility factors, but this talk will introduce an investment strategy that extends this to defensive quality and low volatility multi-factor investment.

[Chart 1] Average excess return of MSCI World Minimum Variance Index

Source: State based on Factset, MSCI World Factor Index
Street Global Advisors (SSGA)
Created (December 1997-September 2020, annual rate)

Roots and characteristics of quality and low volatility investment

Quality and low volatility factors are often categorized as relatively new factors compared to classic factors such as value and size, but they have old roots in terms of practice in equity investment and are "the father of value investing." Benjamin Graham, who is famous as ", should find high-quality companies (with sustainable profitability) in addition to valuations such as PER (Price Earnings Ratio)1. There are also reports that Warren Buffett's return on investment, which inherits Graham's investment philosophy, is sourced from low volatility and quality in addition to value2.

The effectiveness of investment in these factors can be confirmed from the perspective of risk / return and correlation. Exhibit 2 shows the return on investment of the MSCI World Factor Index divided by the risk (standard deviation), with low volatility and high quality index investment efficiency in the long run (0.72 and 0.66, respectively). Can be confirmed. Chart 3 shows the correlation between each factor, but the correlation between quality and low volatility is low (0.33), which focuses on aspects where quality is corporate fundamentals and low volatility is different from stock price returns even with the same low risk factors. It is thought that this is due to the fact that they are doing so. In addition, since the quality factor includes an index related to profitability3, it has a gentle positive correlation (0.46) with the growth factor, and not only the dispersion among defensive factors but also the factor dispersion effect with the growth side. Can also be expected.

[Chart 2] Return / risk ratio of each factor index

Source: Created SSGA based on Factset, MSCI World Factor Index (December 1997-September 2020, annual rate)

[Chart 3] Factor correlation

Source: Created SSGA based on Factset, MSCI World Factor Index (December 1997-September 2020, annual rate)

1 Benjamin Graham, “The Intelligent Investor”, HarperCollins (1949)
2 Andrea Frazzini, David Kabiller and Lasse Heje Pedersen, “Buffett's Alpha”, Financial Analysts Journal (2018)
3 Generally, return on assets (ROA), return on equity (ROE), capital structure (financial leverage), and profit stability, which indicate profitability, are used as indicators of quality factors.

Equity investment strategy that combines quality and low volatility factors

Since 2015, SSGA has been providing Japanese investors with a stock investment strategy that combines quality and low volatility factors. As an outline of the strategy, using MSCI Kokusai as a benchmark, by inclining the portfolio to stocks with high quality and low volatility, the total risk will be reduced by about 10% compared to the benchmark in the medium to long term, and the annual rate will be 0.5 ~ It aims for an excess return of about 1.0%.

Chart 4 shows the operational performance of the representative account of this strategy. It should be noted that (1) the benchmark has been stably outperformed in the medium term such as the past 3 years and 5 years, and (2) the MV strategy is significantly inferior to the benchmark. It follows well, and (3) it has exceeded the benchmark even since the beginning of the year after the corona shock. Chart 5 shows the investment performance since the setting, but while the return exceeds the benchmark by about 1%, by reducing the total risk of the portfolio by about 10%, the return / risk ratio is 0.45 and the MV strategy (0.50). It has a good track record even when compared 4.

[Chart 4] Operational results of high quality and low volatility strategies (representative account)

Source: SSGA, as of the end of September 2020 (yen basis, investment trust standard)

[Chart 5] High-quality, low-volatility strategy setting Since then, operational results (representative account)

Source: SSGA, July 2015-September 2020 (yen basis, annual rate, investment trust standard)

4 The results of backtesting and simulation for a longer period of time confirm that the return and risk characteristics are almost the same.


In this talk, we introduced a stock investment strategy focusing on quality and low volatility factors. While the MV strategy has a high downside effect, high tracking errors against market or policy benchmarks and subordination on the upside are cited as disadvantages. In addition, the MV strategy is generally considered to be a relatively drastic low-risk strategy because it reduces the total risk by about 20 to 30% of the benchmark. The total risk reduction of the strategy introduced in this lecture is about 10%, which is moderated compared to the MV strategy, and the tracking error for the benchmark is also suppressed5. In addition, since it aims to earn excess returns, it can be said that it is a well-balanced low-risk strategy that pays attention not only to risks but also to returns, and we believe that it will be an option when considering low-risk equity investment.

5 In the operation results since the establishment of the representative account (July 2015-September 2020), the performance tracking error against the benchmark (MSCI Kokusai) was 2.92%.


講演者:清水 英彦



【図表1】MSCI World最小分散指数の平均超過リターン.png

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