10 months on, NN IP again highlights multi-factor resilience to Brexit
Some 10 months on from the surprise referendum result leading to the UK exiting the EU, NN Investment Partners has again highlighted the ability for multi-factor portfolios to withstand the market uncertainty that the event unleashed.
In particular, it points to the performance of its NN (L) Multi-Asset Factor Opportunities fund, which launched on 23 March 2016, and which served up a total net return of 18.8% in its first year with a volatility target of 10%.]
Stan Verhoeven, lead portfolio manager, said: “The strategy of this fund builds further on that experience and combines the benefits of a multi-asset and multi-factor approach. The fund showed a good performance before and after the Brexit vote in June and July 2016, underscoring the diversification advantages of this approach.”
The fund invests in five factors – momentum, value, carry, flow and volatility – and four asset classes – equity, fixed income, currencies and commodities. According to NN IP, the combination helped the strategy perform despite the uncertainties of Brexit:
- Momentum before and after Brexit profited from the continuation of the long term trend in markets. For instance British government bonds strengthened further
- Value performed badly in the days following Brexit, when undervalued investments took a hit as valuations worsened. The pound, for example, weakened further
- Carry had a small negative contribution the day after Brexit, but soon recovered as the term structure in commodities steepened and yield differentials in currencies normalized
- Flow, which benefits from short-term mismatches in valuation resulting from overreaction, did well. The fund was short on the equity markets going into Brexit and long in the subsequent recovery
- Volatility did badly, as one would expect in an environment where volatility increases and where the factor is short on implied volatility. However this factor more than recovered in subsequent weeks.
The arguments around multi-factor investing in relation to Brexit have been highlighted by other managers too.
Shortly after the referendum Robeco and RAM Active Investments argued the case for both multi-factor and systematic strategies, which they said had stood up well to the uncertainties unleashed in markets following the vote.