Fintech Insights

Enhance Your Factor-based Investment Capabilities

July 26, 2018

As institutional investors make wider use of factor-based portfolio strategies, it is critical for investment risk management technology to provide the most flexible factor capabilities. Specifically, risk managers need tools for evaluating the factor profiles of not only an extensive universe of listed funds but also equity factor premia indices, newly created to capture the effects of the most reliable factor strategies under different market and economic conditions. In combination, these features will allow investors to uncover new active strategies which can outperform passive approaches.

Recent academic research has suggested that only a relatively small number of factors within each region – North America, Europe, Japan and other developed and emerging markets, including the BRIC economies – provide a reliable long-term return: the so-called risk premium. However, these factors are not always obvious, and older generations of value funds, for example, have often failed to capture the necessary exposure to provide long-term outperformance.

FIS’ investment risk management solution, APT, allows clients to access the widest range of potentially return-generating factors, and to research and screen those factors that actually drive the return and risk on stocks. Our risk factor database is extensive and multi-asset-class in nature, with more than 800 fundamental, style, regional and macro factors available.

The best way to implement factor investing is to identify the most appropriate factors, and then to build a rigorous strategy to gain exposure to those factors – without taking on unnecessary costs or other unintended risks. The factor premia indices available within FIS’ APT offer an invaluable tool, as they demonstrate standardized volatility and low correlation with each other. This in turn allows our clients to analyze a wide universe of funds and construct factor-based allocations that meet the varying risk appetites of their customers.

To take advantage of modern factor-based investment approaches, wealth managers and asset allocators need access to a broad range of available factors, together with highly flexible tools. APT meets these requirements head-on – providing the most easy-to-use analytic system for assessing factor quality across different regions.