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Design Considerations in Multifactor Strategy Implementation

April 2019
By Gaetane Spassoff, Director, Systematic Equity Strategies and Mark Thomas, Senior Vice President, Systematic Strategies

This paper seeks to provide another layer of transparency into the academic ideas and applied research that support the decisions embedded within the core multifactor investment strategies offered by Hartford Funds. The paper discusses the following key points:

 
  • Among five prominent factors: value, momentum, quality, small size, and low volatility, value may be the most important due to its effect as a standalone investment criteria and the influence it can exert in modulating other factors. Value, as an investment principle, is most effective when combined with other factors, in our view.
  • An integrated factor scoring approach, which identifies companies that exhibit favorable exposure to the desired factors, generally results in higher factor expression than an isolated approach, which combines separate factor portfolios.
  • Emphasizing one factor over another via weighting schema can influence risk and return potential. Additionally, each factor when combined, plays an important role in potentially reducing risk and dependence on a particular market regime (e.g., value or growth cycle).

Investing involves risk, including the possible loss of principal. All investments are subject to market risk, as well as changes in interest rates and the financial conditions of companies and other factors. • Foreign investments may be more volatile and less liquid than U.S. investments and are subject to the risk of currency fluctuations and adverse political and economic developments. These risks may be greater for investments in emerging markets. • Fixed income security risks include credit, liquidity, call, duration and interest rate risk. Actual events may differ from those assumed and changes of any assumptions may have a material impact on the data discussed in this paper.

 

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