Polcano trillions. I'm Joel Webber and I'm Eric Bell Tunis Eric. There's this thing out there called factors. What is a factor, right? Factors? Obviously it's a word many people know for many different things, like the X factor. So factor to me, I would just assume is there are things that have characteristics of stocks that aren't say large, mid and small and more traditional ways to slice and dice stocks, or characteristics being
growth and value. To me, are the two biggies. They were like, you know, they've been around for like thirty forty years, if not longer, but now they've kind of a lot of academic research has uh come out and divided it into even more fine factors. So the big ones that seem to be legitimately accepted our value, cheap stocks, momentum right where all the sort of performance chasing quality, which is sort of more like the Warren Buffett look
for good balance sheets. Then you've got size, which is uh, you know, smaller size stocks. And these are the things that active managers have been leaning on for years to get out performance. So they studied how does active outperform and they figured out, well, they're either leaning towards small caps, they're leaning towards value, they're chasing performance, or they're leaning
on good balance sheets. So what they've done now is they've taken those alpha techniques and made them into beta, which is just a mark, you know, an index that tracks these techniques. So to me, factors are taking alpha and converting it into cheap beta. And once you've got that index, that's where the ETF comes in. And they're highly popular, as you can imagine, because to take these little methods and then maybe you put them on top
of your portfolio. Sometimes you can replace them. It's a way to try to outperform, but for way less cost than you would pay an active mutual fund manager. In some of the cases, the big popular ones are under twenty basis points at this point. Um This year, I think is a big year for factory t f s. Four of them are in the top twenty inflows year to date, and they are accounting for forty billion dollars in flows. If you take all equity e t F
flows this here's only five billion. Now, there's some weird things that go into that net number, but let's just take away that a lot of people are using factory tf this year, especially low ball to sort of low volatility. That's low volatility. There are stocks that don't move around
a lot. They're using these factory tfs this year, I think more on the defensive tip as a way to sort of navigate a market that's a little more volatile geopolitical situation that's volatile, and that's the way they're playing uh it this year. So factory t f s are can be used tactically short term or bought for the long term, which is the multi factor idea, which we're going to get into. That multi factor thing is exactly
where we bring in. If you know anything about Trillions, you know that we love to outsource whenever possible with the Field Report. And so Anti Massa joins us on this episode of Trillions to talk about the multiverse universe multi Do you know about the multiverse? Well, that's trip. It's a whole different situation, but I it does. They both have the word multi in them. So so Anti Massa from Bloomberg News joining us on t this time
on Trillions, the multi factor universe. Annie, welcome back to Trillions. Hi, what is multi factor? So multi factor is the idea of taking many different factors and combining them into a single product. And the reason you might want to do that is because you're trying to capture the different attributes of different factors and outperform in that way. So what what are you getting exposure wise with these products? Okay, so I bear with me. I've never seen the Avengers,
but I'm just gonna I have so many questions. How could you not have seen the Avengers? But I'm just completely gonna wing it with this analogy. So let's see where it goes. So if you have a bunch of different factors, all these different traits basically of that are supposed to drive investment performance. When you put them together in a multi factor product, it's kind of like having a team of superheroes. Does that work? Yeah, we're traveling
Wilberries there. It's like a supergroup with Bob Dylan, George Harrison, and the guy from Yellow He's great. I mean, I just forget his name. So Traveling Wilberries are multi factor e T S. Yeah, I mean, how could I explain
it anymore clearly than that? And Eric, when you when you think about the multi factor e T F s, what are you looking at the reason that we're very bullish and b I on this category is because when you think about single factors, it sometimes takes timing, and when low ball is hot, that sometimes people chase into it. Then it gets unhot and people get disappointed. Over the past five seven years, I find that people advisors have been a little turned off by trying to time these.
Multi factor takes all that off their hands. They don't need to worry about it. It says, hey, look, let's just try to track them all at once, and it can lower the volatility between the factors. So it makes a lot of sense. But like if I am commercially, if we're in a moment where momentum is hot and you get exposured to momentum, but I also have you know, growth or value that's not going to be as dominant
of a factor. How does that come into play? What you look, This is the same thing as diversification, the whole concept you're going to sacrifice the home run to ensure a singular double. Right, that's the same concept. Momentum is hot and you don't own the momentum e TF and you will multi factor. You're not gonna feel all that.
That's what you give up though, But Remember, momentum can go bad and sour quickly, and I think for advisors, they generally face their client every once in a while they show them the sheet of funds they own, and I just think a multi factor won't move that much different than the S and P, whereas a momentum et F can really lag or value et F and that's
harder to explain. So I think the multi factor is will make the radar less when they have that client interaction, and that's why I think they're gaining popularity and could
grow a lot. By the way. One other thing is there are some multi factor funds that are actually trying to time the market using factors, so actually rotating through um these different factors, and and that's I mean, I feel like it's a little bit untested, but that's another way that they're trying to account for different factors performing better at different times. When we think about how we classify these, smart beta comes to mind. Is this a
form of smart beta? Yeah, multi factor and factor products are under the smart beta umbrella because you're just basically using something other and market cap weighted indexes to try and drive returns. In smart beta. ERIC is another way of talking about active Yes, so I would consider factors a massive area within the wider tent of smart beta because some people wouldn't consider growth maybe a technical factor, but it's definitely in there. Um. I also think equal
weighted and there's some that just wait by revenue. There are they technically factors? No, but they're all part of this way to do something different than a market cap weighted index. Uh And really, in my opinion, it's the new active. This is your chance to maybe outperform. It used to pick an active mutual fund for that. Now people are doing it this way. And any what did you what was the big takeaway would you learn? Well?
I went to this conference, this inside smart Beta conference, and it was out in Boston back in the spring, and a bunch of financial advisors attended, and smart beta is obviously the focus of the conference, but multi factor is a huge Multi factor investing was a huge topic and a lot of the financial risers were trying to figure out is this something that their clients would be interested? How should I think about factors? How should I think
about timing the market may be using factors? And these were the kinds of questions that were coming up. Okay, so and he took a recorder to this event, so we'll soon find out what you learned. But a report kicks off in the black Rock clubby I'm Andrew head of Factor Investing at black Rock Today. I'm at Spine white Hole in the hall. When you enter one of the reception areas at Black Rocks Manhattan headquarters on fifty three Street, there's a TV screen behind the front desk
playing an ad campaign on loop. It features Dr Andrew Ang, black Rocks head of Factors, talking to celebrities about a certain kind of rules based investment strategy called factor investing. The two main outcomes for investors to enhance returns ultra reduced risk and we can inhance returns with value quality momentum. And in one of these spots, and talks to Frozen star Adina Menzou, you know the one who's saying let it go. And they find surprising common ground between factor
investing and musical performance. I think investments in music um will sim a little bit different. Music has structures that can move you investments and numbers. They're all about these patents too. Yeah, I feel like my set list is my investment portfolio. I try to achieve some balance and harmony to tell an even greater story. So what are the key attributes of a great investment factor? Investing is becoming a bigger deal in the E t F industry.
It's a somewhat unusual clash of academia where factors originated and the fast paced investing world. I wanted to take a closer look at how factors are getting woven into E t F products. In particular, I wanted to find out why asset managers are becoming interested and even more complex products called multi factor funds. Here's how Ben Johnson, an analyst at morning Star, explained the factor landscape to me.
If you think about multi factor strategies, I think, you know, it's easiest just to decompose that into you know, it's two sort of component words. They're multi in factor. So easiest to start with factors, which are just sources of returns that can be explained by a story that has some sort of intuition behind it. First and foremost. So let's take value as an example of one of the
best known factors. It makes sense to buy stocks and bonds that are cheap relative to what they're truly worth everyone I think can get comfortable with the concept of buying low and selling high. Value is one of the most straightforward factors, picking out investments that are inexpensive to buy compared with some measure of what they're actually worth. Another basic factor, growth singles out investments that might be younger and likely to increase in earnings growth and returns.
The idea of combining and harnessing the power of various factors together lad to the birth of multi factor funds. Trying to exploit any one of these factors in isolation can be difficult because these factors have times where they do very well, they have times where they do very poorly. So if you can mix them together in a multi factor fund, the idea is is that it will smooth
out that that volatility. So multi factory t f s attempt to do this, putting them all together in a construct that, for all intends and purposes, looks like an an active strategy at the end of the day. Multi factor investing is a relatively new phenomenon in ETFs. There are about a hundred and eighty six multi factor e t f s on the market, with more than half of those launched since According to morning Star data, these multi factor funds have about fifty five five billion dollars
in assets. So what's behind this increased interest in the multi factor approach and will it really click for retail investors? I headed to a recent conference in Boston looking for some answers inside SPARTBATO was held in June at a hotel overlooking the Boston Harbor. It's a conference that attracts a lot of financial advisors, and factor investing was a big topic this year. My feet got a little worn out chasing down advisors all day to talk factors, but
it was worth it. I just said, to tell you, I love your shoes. I was like, So, with an unexpected boost of confidence, I sought out Scott Ladner, CEO of Horizon Investments, a financial advisory firm. He spoke on a panel about how to time the market using factors. Scott chatted with me on the sidelines about the proliferation of multi factor e t f s. One big hurdle for adoption, he said, is how to bring them to
a mainstream audience. If you go talk to financial advisors, many of them don't really understand how to use the factors, especially the multi factor thing, um and and really, if you're going to drive assets into these strategies, you've got
to tell people how to use men. Why, you know, we we've not seen a lot of adoption as a one offer standpoint from from the pointancial advisors for the multifactor funds again because fundamentally, financial advisors are going to put their clients into things that they can explain back to them, um and and and if financial advisors are having trouble understanding the purpose of a fund or holding in their portfolio, they're gonna be much less likely to
use it because when and if it goes wrong, the answer is, you know that they're going to need to be ab explain to the client why it was in there in the first place, and what when, what went wrong, and what they're going to do to fix it. And the multi factor suee UM is just more complicated. It's just one more layer of complexity, and so that the hurdle to get something like that into an individual advisor's
portfolio is rather high. Kip Meadows, CEO of the firm Nottingham, says the multi factor approach makes sense as a way to sort of blend active and passive investment strategies. These products usually are less expensive than actively managed mutual funds, but praise here than e t f s tracking broad benchmarks.
Who's been talking the industry about active e t s for quite a while, it's always this year might be the year for active e t s, and then it doesn't quite have the growth, and it seems to be accelerating now. Um I think it makes a lot of sense to get a portfolio manager that knows what they're doing to help make some judgment calls as to what factors might be in favor over the next coming period of time. If you want to know what some of
these products actually look like, consider invest Goo. When it acquired Hoppenheimer Funds, It's snapped up some of its dynamic multi factor funds like oh MFL and o m f s, which adjust their factor exposure according to market cycles. And black Rock launched it's d y n F fund in March with a similar goal of shuffling three factors based on what the market is doing. It's the first TTF that doesn't bear black rocks I shares brand to highlight
that active aspect. Black Rock declined my request for a meeting with Andrew Ang, saying that he oversees many types of factor products, not just e t s. Still, I did get a chance to hear from him when he appeared on the conference's main stage. Ang doesn't see factors as being overly complex for a mainstream audience. He said, he sees them as democratizing investing fundamentals. He likened this to the spread of streaming music. Music metaphors are big
for Ang. By the way he plays the keyboard in a black rock internal band. What's happened in music? He's on funding. I used to record songs in the radio on a cassette tape. But the rise of streaming music means that you do not have to buy the whole thing. You listen to the track you w was you collate, just attracts you want, and you listen to them whenever you want, and your music experience is the fatal for
Asset management is undergoing that same transformation. We used to go to one asset manager, and that asset manager would give us the whole thing, the whole album. You do not have to buy that whole thing. Factors are part of this evolution. Factors are active, but beyond the lofty goal of democratizing access to factors. There's another, much more basic reason why issuers might be taking an interest in T factor funds right now. E t F creation is a crowded realm. This is a new style of funds
that issuers can pitch to customers. Here's morning Stars, Ben Johnson Again, E t F providers are running out of white space when it comes to product development. I liken it to showing up at the beach at three o'clock in the afternoon on a sunny day when all of the prime real estate has long since been taken and all you've got left really is some cramped spaces next to the garbage can that's adjacent to the exit to the beach. Uh. They're looking for every last nook and
cranny that hasn't been filled. Andy, that was amazing, Thank you very much. Eric. Can you tell me about the performance of these products. We heard about the inflo but what about the performance. Well, they're all over the place. They vary right this year, low balls have in a good year, right, it's outperforming the SMP. So guess what, that's where a lot of the flows are going. In two thousand and eighteen, there was a chunk good time where value did well. Remember it was a rough time.
But growth has done really well. I mean that's done very well over the years. Momentum has done pretty well. That had a good year I think was a big year from momentum. But part of the issue here is that these things are designed so differently. Some of them are more hardcore than others and some are more water down. And so a lot of them that are watered down and have a lot of beta and them have generally done pretty good because beta and the market's done well.
The more hardcore ones tend to either rip or just get crushed, and those tend to see less assets. I think advisors are more scared by those. Black rock to me makes the more water down ones. I mean they are very much in this commercially to try to get assets. So you know US m v M, t U, m uh QAL, those have taken in. You know, we're talking big boy flows, but you know they're pretty much moving
around the SMP not nothing too crazy. But the performance will vary depending on what's going on in the market. It's not like one always up forms and any what what do you think investors need to be looking at when they're setting whether or not they're going to invest in the space or be which product they should invest in. I guess one thing to keep in mind is UM. On the plus side, if you're just buying a broad index of UM large cap US stocks, you you have
a lot of exposure to big tech companies. Something like a multi factor product could help offset that, like high concentration and say tech um and go towards diversifying. On the other hand, these products aren't completely road tested. Since so many of them have been coming out in recent years, we haven't really seen how they perform in a period of extended volatility and losses from the market. So that's
one thing to keep in mind. And this brings up a very big point for US and b I because the academic research is based on long short portfolios, which are really hardcore only one issue. Where does that that way? But that's how like a q R cliff fastness, that's how they do it, That's how a hedge fund would
do factors long short UM. Most of them go long only, and then their degrees of hardcoreness, Like there's some that might have like a value a p of like thirteen that's hardcore, and then some might have a p of just about the same as the SMP. And I think that most of the money goes to the water down ones. And I think investors could be disappointed because we called the beta vortex. Anything that has beta in it, it sells better. But when the market goes down, that's not
going to help you at all. The correlations are very high to the market. You're not getting diversification. But that may not be what an advisor are looking for. They may actually be looking for something that's beta but has a cool name story to tell. So the marketing and sales of this definitely is a major unexplored part versus the academic literature that determines factors work. And those two things are not married at all. What else from any's
reporting interested you? Well? I have two things on Andrew Wang. First of all, I can't help but find it a little annoying that they Black Rock wouldn't let you, you know, him, talk to us. I mean, Martin Small has been on and that's effectively or was they seem like they're in a band together. Anyway, we gotta do some more work here. Yeah, I'd love to hear the band sounds like, what do you think we're totally gonna get him? I'm picturing late
eighties hair metal. But anyway, that's just my my, my view. Um. So, Andrew Ayang said something else which you said, he like loves these music metaphors. I've heard him use the MP three analogy for factors, but that's my metaphor. I I've used the MP three for the E t F. To me, factors are like a genre of music. They're like jazz or country. The E t F is the MP three. Um but he did bring up a point about used to have to buy the whole album and now, which
was in the music business is called forced bundling. I know, Anny like the Cars, which is a great band, but let's face it, every Cars album has like four awesome songs and then maybe six like so so ones. He's, you know, the greatest hits you can push play and that things go besides the greatest hits. That's cheating, cheating. I hate you, Okay. The force bundling, I think, is something that hurt the music business, and the MP three
came along and obviously revolutionize it. By the way, I think you might just be a little bitter that he's using a music analogy when you like to use the MP three thing as your your go to medical I don't think so. I just think that I've been using that for years. I used it my book, and I think that the MP three is a is the structure in which you buy music. Factors are like a genre in the record store or whatever, or in the in the iTunes library, and so I think that's the better
way to look at it. But I see what he's saying, and I do think that, um, his concept of being able to put everything together exactly how you want, very cheaply, the MP three is a I think a good metaphor. UM. Here's a question. One person you interviewed that I thought was interesting was the advisor who talked about multi factor ets being like complicated. Was he a user of them or like, I sympathize with somebody like this, who's like going to talk to like my mom an attempt to
explain exactly headwind to the growth. Yeah, So he was saying that from actually being on the front lines of you know, what investors want, what individual investors want, and what they understand, it's still not quite that easy to get over the hump of like how do you how do you explain first of all, honestly what a factor is, and then something kind of esoteric and academic like multi factor investing in why you would need it? Can be a little bit of a bridge too far for some people.
One way that he said that financial advisors can one strategy financial advisors can use is just explain um kind of how it might fit in with your investing goals without having to get into the nitty gritty of like what exactly is momentum, what exactly is quality? I agree with you, because uh one E t F we analyze a lot as GSLC, the Goldman Active BATA. This thing has been a huge hit, like six billion dollar or
is it's multi factor? If you look at how it's done, it takes four factors and puts them in separately each but within each factor there's a myriad of metrics they use when all of a sudden done, there's probably twenty five metrics that go into this sort of formula. I can't imagine that being explained. However, what they do that's so genius is they make the E t F almost look like the SMP. We'd call that low active share, very low tracking error, so the advisor may never need
to explain it. They'll just say, hey, look I got you this new Goldman quant thing. It's the latest stuff they're given us. It's Goldman. Uh, it's the quant stuff. It's got more tax efficient and by the way, my in my for me as the advisor, there's no career risk.
No one's gonna look at g s LC and go oh my, got it underperformed because it won't because it literally holds almost the same stocks, And it's so cheap for fee based advisors who are because they now get paid out of the same assets that the client is in, they're incentivized to go cheap. So only nine basis points. So I just find that active mutual funds. This to me is the you know, we actually equate it to Terminator in Terminator too, you know the cyborgs sent from
the future liquid metal. Yeah, this thing is so it checks every single box for the fee based advisor's brain. The one thing that it doesn't is a simplicity. But I think that as long as it doesn't do anything crazy, they might trust it enough to to actually buy and they are. It's got six billions and get this, it hasn't outperformed. It's it's all bought on those other metrics. That's what makes us so fascinating because these things, some of these will have their shiny object moment and then
they'll crash. But this one had never had that. So tell me more about its portfolio. What's it got? Let let me read the top ten, the top five stocks, Microsoft, Apple, Amazon, Facebook, Johnson and Johnson, Google, JP Morgan. I mean, doesn't that sound right? Like what's so smart about that smart data angle? Goldman is not messing around. They know the advisor's brain and they perfectly calibrated everything they would need. This is
why this one sells. And then you've seen some other issuers like say like a leg Mason or they've come out with these they've tried to convert their secret active sauce into a smart bata et F. They charge like thirty basis points. It just doesn't do enough. Um, it's too you know, this one's nine bits, which is the main feature. Um. And I think that's where Goldman was smart, just to go straight at where they were going to
have to go anyway. So to me, Goldman vanguarded the factor space and everybody's followed and most of the flows have gone there. We tracked this average asset weighted fee for smart Beta and it's now down to, I believe last time I checked the twenty four basis points. In other words, if you take all the smart Beta e t F s and you take the average feet, it might be like sixty basis points, but the asset weighted average is twenty four. So advisors keep driving down that
number by going for the cheaper ones. So to me, this is another place where cost actually might be paramount to performance. They're mixed. I mean, I think performance matters to a degree, but there's also this idea of using these really cheap ones that give you a story but don't necessarily do much different than the S and P.
They're they're safe. If anything, I think what we're what we're seeing here is uh, Wall Street is relentlessly looking for new stories, and like, here's a really great story that we can put in a new rapper and get it out there. And as long as it is part of that zeitgeist and reaching for you know, whatever factor is happens to be hot right now, you kind of get a little bit of exposure to that here, especially in the E t F space where it's so crowded already.
One of my favorite parts of the field reports is the stuff you guys let in there that has nothing to do with with investing. Who ran over and loved your shoes? Who was that? Gosh, some really kind woman at the conference. I was just there trying to figure out how the heck to use that recorder. I love love that part, mainly because of the amazing confidence was that gave you. I know, because I was like, it was my first time doing a field report. I was
a little nervous. I was feeling a little cautious, and I'm there, like with the recorder, and so she, like an angel came out of nowhere. And what kind of shows were that? They were black high heels. Annie, Thanks for joining us and Trillions and for doing our job for us. Thanks thanks for listening to Trillions until next time. You can find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcast, Spotify, and wherever else you like to listen.
We'd love to hear from you. We're on Twitter, I'm at Joel Webber Show, He's at Eric Falcinus, and you can find Annie at Antonia Masa. I don't know, but that was listen. Listen, I don't know what you gotta try you in I who, I don't know. This is a safe space, safe and you can find Kenny at Antonia Busca. Trillions is produced by Magnus and Rickson. Friendcesica Levie is the head of Bloomberg podcast by