French fund house BNP Paribas Investment Partners is moving towards offering factor-based multi-asset solutions to institutional clients, although it is very early days for such strategies, particularly in Asia.
Factor-based investing focuses on the underlying influences on returns, such as volatility and value. This approach seeks to explain why some assets or sectors move together and to offer more efficient portfolio construction.
Colin Graham, London-based chief investment officer at BNPP IP, said the multi-asset team started considering factor-based investing last year, with the idea stemming from the findings of its risk models.
“We were monitoring the portfolios from a risk perspective and were interested in inflation and volatility risks," he noted. "The results were interesting, and we thought there must be a way to invest directly in those ideas rather than having them as a consequence of an investment decision.
His team is busy investigating how the research will be used. The initial plan is to use it in a sub-portfolio of an existing income or growth multi-asset product. If that is successful, it could be rolled out as a stand-alone product.
“I am not sure if we have a stand-alone product by the end of this year, but we will start using it in multi-asset portfolios this year," said Graham. "We haven’t quite finished with the research yet, but the initial findings look very interesting in terms of how we invest and the results.
BNPP IP offers factor-based investing within its pure equities and fixed income product range, but will be its first time it would do so for multi-asset solutions.
Factor analysis is already a key part of the firm's asset allocation process, noted Graham, and factor-based investing within multi-asset portfolios is becoming increasingly popular. Some firms have made moves in this area but the space is not crowded, he said. BlackRock and Schroders are among the fund houses to have resources focused on multi-asset factor analysis.
Factor-based investing helps manage risk within portfolios but, as with all multi-asset strategies, correlation across factors – and asset classes – can increase when volatility reaches abnormal levels. In light of this, Graham's team uses alternative scenarios "to help us think about ways to hedge ourselves against extreme events".
BNPP IP is likely to target institutional investors initially, said Graham. "At this juncture, for private banks, it probably remains a complex strategy to offer and to explain to their clients."
Asked how much interest he is seeing in factor solutions in Asia, he was non-committal.
Demand in the region is currently focused on income-generation, so BNPP IP has developed its multi-asset offering with that in mind, starting with its global multi-asset income strategy, said Graham. "Factor investing is here to help us achieve the desired outcome on an optimal risk-adjusted basis,” he added.
In the region, BNPP IP’s multi-asset offerings have seen most success in Hong Kong and Singapore, suggesting that this is where it will concentrate its efforts to market factor-based solutions.
Meanwhile, BNPP IP is on track to launch an emerging-market multi-asset fund in the first quarter of this year. The firm has two multi-asset products already being sold in Asia, a European and a global multi-asset fund.