Whilst not common in MPS solutions, this is often an investment approach used by some private client investment managers. Whilst there is no shortage of sector-specific ETFs to implement a sector allocation strategy, there are – unfortunately – very few funds on platform that embrace a sector-selection, differentiated approach to world equity allocation. Those that do merit investigation.
Option 4: Active Factor Selection
The new kid on the block. Whilst “sector rotation” is long established, factor selection or factor “tilting” is a similar thesis that links the performance of different factor-based indices with different market regimes. Again the performance of different factors in different scenarios is well researched and deeply evidenced, making this an interesting way of implementing a view.
As with sectors, there is no shortage of factor-focused ETFs, and furthermore there are some multi-factor funds available on platforms. The key is how do they allocate to the different factors – do they use a static or dynamic approach?
Similar to sectors, the dispersion between factors can also be very pronounced. For example selecting momentum over value for years after the financial crisis made a material difference to performance outcomes, whereas in 2022, the reverse applied.
Conclusion
So for asset allocators implementing a global equity allocation, but want something differentiated, there is actually no shortage of actively managed alternatives to choose from, whether actively selecting securities, regions, sectors or factors – or a combination of all four approaches: there are plenty of differentiated active approaches to choose from.
Henry Cobbe is head of research at Elston Consulting
