Active managers pursuing systematic and multi-factor strategies say that their models have stood up well to Brexit, and the volatility unleashed on global markets since the referendum outcome.
One week on from the referendum, Patrick Houweling, the portfolio manager of Robeco’s Global Multi-Factor Credits fund, and Emmanuel Hauptmann, member of the Board of Directors at RAM Active Investments, have both noted that their models have stood up well to the challenges put to them.
The academic basis for factor investing goes back to the 1970s, and it has been tested through other crises, such as the global financial crisis of 2008-9 and the bear market in equities in the early 2000s. That does not mean there may be no lessons to learn from the way a multi-factor equity or credit fund has performed over the days since the Brexit vote. However, the multi-factor modelling seems to have held up, Houweling argues, and this is true whether looking at events in terms of countries or sectors.
Rules-based multi-factor investing can react over time. For example, if the model sees risk factors rising it can give lower scores to, say, energy companies. But the momentum factor can also pick up ongoing underperformance of said energy companies against the market. That means that two out of four factors may already be spotting a reason to look to other sectors that may represent a more defensive position. Events may be specific in time, but patters of underperformance tend to replicate, Houweling suggests.
Hauptmann meanwhile says that the systematic approach of the portfolios offered by his company, such the Long/Short European Equities strategy, have done what was expected of them in the days immediately following the Brexit vote.
The strategies were reducing UK exposure even before the event, while exposure to assets such as gold via mining stocks, helped the portfolios to perform relatively well as equity markets more broadly fell. The defensive stance came as the models had positioned off the basis of other factors such as weaker earnings momentum.
As a result, there was no reason to intervene in a different way in terms of managing the portfolios on the Friday immediately following the referendum outcome, he says.
One key risk that was already hedged out to a degree was currency risk stemming from sterling, Hauptmann added. The strategies he helps oversee tend to hedge about half the UK exposure in this respect, which reduces risk in terms of returns calculated in euros.
The strategies are neutral on sterling, however, Hauptmann says that he expects sterling to weaken further, in light of the announcement by the Bank of England that it stands ready to cut its key lending rate to zero and inject money into the UK financial system.
In addition to the monetary policy change that would serve to weaken sterling, on the fiscal side the country faces ongoing challenges in the face of a budget deficit and significant national debt.
The rate of sterling versus euro is likely to be volatile; there are factors also pointing to euro weakness, he adds. For example, the eurozone faces ongoing deficit and debt problems that are unlikely to see interest rates rise anytime soon. Also, relatively speaking the other key non-eurozone currencies such as CHF, NOK and SEK are appreciating, reflecting large trade surpluses and balanced budgets.