Factor Tilts

What are factor tilts?

Factor tilts are a diverse collection of strategies that deviate from market indices according to specific rules. The simplest factor-tilted strategies involve alternative weighting schemes, such as equal weighting or fundamental weighting. More complex varieties of factor tilts range from risk-based strategies, which do not take account of expected return, to factor tilts such as size, value, and momentum, which are explicit bets on risk premiums. Factor tilts also include strategies that combine simple tilts in investments, such as minimum volatility and quality.

What is smart beta?

Smart beta is another name for factor tilts. It simply describes a process of allowing investors to define their “beta” rather than accepting a market-cap-weighted definition.

What factors can I implement or emphasize?

Aperio can implement a range of factors including earnings yield, growth, leverage, momentum, size, value, volatility, and yield. Aperio can work with you to develop a factor strategy that best reflects your investment thesis.

How do you create a factor-tilted portfolio?

A factor-tilted portfolio is based on market-wide risk factors that many investors believe will deliver return premiums over time. Familiar examples include earnings yield, book-to-market, momentum, and low-volatility factors. Aperio’s factor-tilted portfolios rely on data-driven relationships between individual securities and risk factors, and they are created by an optimizer that generates the most efficient portfolio consistent with a given investment objective.

What do you mean when you say “optimizer”?

Aperio uses risk models and an optimizer provided by MSCI Barra. The optimizer is a tool that performs mean-variance optimization to determine the appropriate combination of stocks and their respective weights to achieve a risk-return profile that comes as close as possible to tracking the selected benchmark given the selected constraints/parameters. In the case of a factor-tilted strategy, the optimizer parameters are set to tilt the selected factors away from the benchmark. The optimizer will then create a portfolio of stocks that meets the parameters and delivers the desired factor exposure.

Are you an active manager? I thought you were an indexer.

Factor-tilted strategies are a means of implementing an active investment bet through factors rather than through individual securities selection. While we remain passive investors, with our factor-tilted strategies we can design portfolios to fit active strategies defined by our clients.

Who decides what tilts to make?

The client decides what tilts to make. Aperio is happy to consult and collaborate with each client so that their portfolio reflects their particular investment views and meets their specific investment and tax needs.

Why is Aperio better than a mutual fund or ETF or commingled investment trust?

For smaller investors or those who do not have or anticipate having Schedule D gains to offset, an index fund or ETF may be the most cost-effective solution. For investors seeking customization to address their specific tax situation, investment views, and/or values, an SMA (separately managed account) may be the most appropriate solution. An SMA composed of individual equities gives the client full control in designing a customized portfolio. We consult with clients to make sure that an Aperio solution is the most appropriate choice for their situation.

Can you replicate ETFs or mutual funds?

Yes. Please contact us to discuss the investment exposure or strategy that you are trying to achieve.

All investments involve risk, including loss of principal invested. Past performance does not guarantee future performance. Individual client accounts may vary. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Please refer to the "Disclosure" link below for additional information.