Smart beta strategy uses ETFs to capture factor premiums

Mar 18th, 2016 | By | Category: ETF and Index News

German asset manager StarCapital has launched a new multi-factor investment strategy aiming to provide market-beating returns. The STARS Multi-Faktor Fund  works by capturing varying factor premiums at different stages of the economic cycle. It selects investments from around 100 eligible ETFs, each designed to isolate the performance of a specific smart beta factor.

Markus Kaiser Star Capital

Markus Kaiser, Fund Manager at Star Capital.

Eligible ETFs provide access to global and regional equities, and include a wide range of smart beta factor exposures such as dividends, buybacks, value, growth, quality, size, minimum volatility and momentum.

The fund uses research including the results of over 20,000 test series, which analysed the strength and timing of positive factor trends. Using factor rotation, the long-term return is supposed to increase compared with an equally weighted factor combination and simultaneously enhance the risk profile.

“Factor premiums can generate outperformance against the broader stock market in the long term, but the challenge lies in allocating the right factors at the right time in order to exploit the sources of return efficiently,” says StarCapital fund manager Markus Kaiser.

The fund adopts the STARS trend-following model which fluctuates the equity ratio between 0% and 100% depending on market signals. For example, the portfolio was still in divestment mode during the very volatile market environment in February because none of the factors showed a positive trend at that time. Since the beginning of March, the ETF-based strategy has had an equity exposure of around 30%.

“Active rules-based risk management allows for a significant reduction in the maximum drawdown of the equity investment and the stability of the portfolio’s return is improved significantly,” Kaiser explains.

Commenting on the growth seen in the smart beta space recently, Kaiser said: “The smart beta concepts are promising and allow for the targeted use of particular investment styles. Similar to what we have seen for classic ETFs, we will witness strong growth rates and new approaches here in the future.”

The fund is authorised for distribution in Germany and Luxembourg.

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