Pension funds and other institutional investors embraced risk factor investing in the first quarter of 2013, with net new asset flows into BlackRock’s flagship risk factor investment strategy, Market Advantage, surging by 42 per cent to $794m from $559m in the previous quarter. At the end of March, Market Advantage held $7.1 billion in assets.
Risk factor investing is a special category of investing under risk-based allocation which focuses on allocating to risks optimally rather than spreading risks equally between asset classes, such as in ‘risk parity’ investing.
Market Advantage provides balanced exposures to the fundamental factors of financial markets: economic growth, interest rates, inflation, credit, political, liquidity, by investing across asset classes. Capturing returns from a wide range of risk premia allows for capital growth with much lower risk than traditional portfolios.
During the first quarter, several institutional investors allocated to Market Advantage including a large US pension fund, a Japanese bank, a French reinsurer. Over the last three years, the UCITS-compliant fund has produced an annualized gross performance of 8.4% per cent with one third of the volatility of equities (source: BlackRock). Risk-adjusted returns, also known as the Sharpe ratio, have been 1.5 for the fund over the same period.
Charles Prideaux, Head of BlackRock’s Institutional business for Europe, the Middle East and Africa said, “Risk factor investing and other forms of multi-asset solutions are proving to be tremendously valuable to pension funds and life companies in choppy market conditions. The success of Market Advantage proves that even as equity markets have surged in the first quarter months, large institutional investors are looking for better risk-adjusted returns with more downside protection than they might get from a traditional balanced portfolio of bonds and equities.”
In 2011, BlackRock’s sub-strategy for UK life companies, the Aquila Life Market Advantage Fund (‘ALMA’), was selected by NEST (National Employment Savings Trust) as one of the building blocks for the NEST Retirement Date funds. NEST’s investment strategy focuses on taking managed risks to achieve better retirement outcomes for its members, an award-winning approach[i].
The ALMA fund invests in a wide range of asset classes, primarily through Blackrock’s range of pooled index funds, with the objective to deliver returns similar to a 60 per cent equity/40 per cent bond portfolio over the long run but with 40 per cent lower risk. A key feature of the fund’s asset allocation process is the focus on risk management, which designs a portfolio that has a balanced exposure to the range of fundamental risks, and incorporates strategies to manage portfolio risk at market extremes. With the UK currently implementing auto-enrolment, more investors are expected to allocate to this strategy and risk factor investments more generally in the coming months.
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