Maylan Cheung
Manager Research, Equities & Multi Asset
Saul Austin
Senior Quant Analyst, Sustainable Investing
Ely Klepfish
Manager Research, Equities & Multi Asset
Key takeaways:
- Stability of exposure is an essential characteristic of factor indices.
- Index-exposure to risk factors may deteriorate between successive rebalances from the targeted value.
- Fluctuations of the factor scores of constituents are the principal drivers of the index exposure decay.
- Stability of targeted index exposure can be reliably assessed by rate of decline of autocorrelations of corresponding factor scores.
Points of differentiation:
- Introduces a framework for assessing factor exposure persistence rather than focusing solely on target exposures achieved at rebalance.
- Distinguishes between market drift and signal evolution, demonstrating that changing factor characteristics are often the dominant source of exposure decay.
- Uses FTSE Developed ex-US Pure Factor indices to compare the persistence profiles of Momentum and Low Volatility, revealing how factor design considerations differ across factor types.
What does our research mean for investors?
- Investors should consider not only the exposure an index achieves at rebalance, but how effectively that exposure persists between reviews.
- Factors with rapidly changing signals may require more frequent reviews to maintain their intended characteristics, while more persistent factors can retain exposure for longer periods.
- Understanding signal persistence can help investors evaluate factor strategies, review schedules and the long-term effectiveness of factor exposure.
