Aon Paper Says Multi-factor Approach Can Enhance DC Schemes’ Equity Portfolios
Aon, the leading global professional services firm providing a broad range of risk, retirement and health solutions, has issued 'The Rise of Factor Investing: investing for DC savers'. This new paper provides insight into achieving 'style' diversification, in particular, the role that factor investing can play in improving defined contribution (DC) schemes' equity portfolios.
Factor investing, also known as 'smart beta', has experienced a sharp rise in recent years as a low-cost approach which can help DC schemes to improve member outcomes. Aon has identified four preferred equity factors that all offer the potential for long-term return enhancement and/or risk reduction: low volatility, value, quality and momentum.
"We are recommending that all DC schemes introduce further diversification into their equity portfolios and believe that factor investing is an important component of this. We believe that DC schemes should consider combining the four factors into a multi-factor equity portfolio in order to smooth returns and mitigate the risk of underperformance from any one factor. Moreover, with a number of platforms already offering factor funds, we expect the choice of strategies for DC investors only to grow .
"There are a number of important considerations when constructing a multi-factor portfolio and our analysis has led to the recommendation that DC schemes should concentrate on global developed markets, begin by equally weighting the factors, and neutralise the regional weights."
'The Rise of Factor Investing' is available at:https://aon.io/2rbe39u
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