Singapore's HP Wealth Management intends to cut the number of active funds on its platform and start investing in factor-based products, reflecting a continuing global shift towards more passive strategies.

Founder and managing partner Urs Brutsch told AsianInvestor that this move towards factor strategies – what he also referred to as “passive-plus” products – was driven by their lower cost and the fact that very few active managers beat their benchmarks.

The external asset manager (EAM) started discussing the merits of factor-based investing two months ago and plans to move in this direction by the end of this year, he noted.

Factor appeal

Factor investing, part of the smart-beta universe, uses indices weighted to capture a specific risk premium or ‘factor’, such as low volatility, value or momentum.

Moving into such products will reduce the overall expense ratio and stabilise the portfolio because “you're less tactical and more strategic in managing the portfolio”, Brutsch said. “Active trading only increases your costs and is likely not contributing to the return."

It is getting asset allocation right that drives performance, he added. HPWM, which is working on reaching $2 billion in AUM, uses third-party funds to implement its discretionary portfolio strategy. 

Brutsch said it was too premature to discuss how many factor-based funds it would invest in, how much it would allocate to them or how many active managers it would axe. 

Factor investing has been gaining popularity among institutional investors in Asia. Hong Kong’s $7.2 billion Hospital Authority Provident Fund Scheme (HKHAPS) implemented its first such mandates in july, as reported. The New Zealand Superannuation Fund is also moving to include smart beta in its portfolio mix, while Taiwan’s Bureau of Labor Funds is increasing its allocation to such strategies.

Issues raised

Concerns have been raised about crowded trades adversely affecting the performance of factor-based funds. One argument is that investors have been chasing returns by investing more into factors such as low volatility and that a sharp reversal of this trend is likely to hurt portfolios.

This is a valid concern, said Brutsch, but using factor strategies in a well-diversified portfolio has its merits. “We would never put all our eggs in the same basket.”

Brutsch is a veteran of Asia’s wealth management industry, having moved to Singapore from Geneva in 1986. He has held various positions at Credit Suisse Private Banking, including head of Southeast Asia. He also had stints at ABN Amro and Clariden Bank before setting up HPWM in 2009.