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Where do returns come from?

Factors explain stock returns The traditional passive investor invests statistically in a single source of return: the market. However, a number of return sources, so-called factors, exist. For example, the Nobel Prize winner Eugene Fama has shown in one of his most important papers that the shares of small companies (size factor) or low priced stocks (value factor) systematically beat the market and thereby help to better explain return differences between stocks with different characteristics. However, in the traditional passive approach these sources of return are not considered – the investor profits only unconsciously and unsystematically of a fraction of the available drivers of stock returns.

Factors exhibit a positive premium In the past 30 years, academic research has identified additional factors that can achieve significant excess returns over the long-term. While some of these sources of return could be explained by risk exposures (so-called risk premia), they are often rooted in irrational behavior of investors (so-called anomalies). Nowadays, the generally accepted sources of return, besides the classical market-factor (1), include the factors size (2), value (3), momentum (4), residual momentum (5), reversal (6), low risk (7) and quality (8).

 

Sources of return
Sources of return

The sources of return reach their full potential only in combination

Cyclical fluctuations Each of these sources of return drives the portfolio return in the long-term. However, the factor premia varies over time, and might have long-lasting and distinct phases of underperformance. Investing in a single factor premia thus requires a very long-term investment horizon and is therefore not a suitable option for most investors.   

High diversification potential Thanks to the low mutual correlations among the single factor premia this problem can largely be resolved: Through a combination of the different sources of return, the underperformance periods of the single factors can be avoided. By diversifying across all factor premia the outperformance becomes robust and thus better investable.

 

Combination of additional sources of return in the global equity market (accumulated excess return compared to the S&P 1200, illustrative)
Combination of additional sources of return in the global equity market (accumulated excess return compared to the S&P 1200, illustrative)

The solution: Multi Premia

Optimal combination of factor premia Multi Premia® combines all major sources of stock market returns in a systematic approach to achieve a robust solution. In addition to the stock market premium, seven factor premia can be systematically harvested. Thus the Multi Premia® solution extends the traditional, passive investment approach in an ideal manner.

Intelligent substitute for a core investment The optimal diversification within the Multi Premia® solution ensures a robust outperformance and a low tracking error. The solution is implemented long-only with physical equity investments. The passive investor receives a smart substitute for a core investment.

 

Embedding of the Multi Premia in the stratetigc allocation
Embedding of the Multi Premia in the stratetigc allocation

The Multi Premia® product range

The Multi Premia® approach is available in a market capitalization weighted version (classic) characterized by a low tracking error and an optimized return potential, in an alternatively weighted version (extra) which exhibits a medium tracking error and maximizes return potential, and as a minimum variance weighted version with a reduced risk (defensive).

Equities Switzerland (in cooperation with the Swiss stock exchange SIX)

SPI Multi Premia®
Investment universe contains 60 of the largest Swiss stocks

SPI Single Premia: 7 factor indices
Investment universe contains 30 of the largest Swiss stocks

Equities World

World Equity Multi Premia®
Investment universe contains 1200 of the largest stocks worldwide

World Equity Multi Premia® Defensive
Investment universe contains 1000 of the largest stocks worldwide

 

Equities Euro zone (in cooperation with STOXX)

EURO STOXX® Multi Premia®
Investment universe contains 300 of the largest European stocks
 

Equities Europe

European Equity Multi Premia®
Investment universe contains 350 of the largest European stocks

 

Equities US

US Equity Multi Premia®
Investment universe contains 500 of the largest US stocks

Further information

Discover Multi Premia®  Investment opportunities in our Fund overview

 

 

 

Smart Beta Solutions: Overview