- In today’s rapidly changing world, investors seek to quickly and clearly understand the characteristics of individual stocks and equity portfolios. By analyzing factor exposures, MSCI FaCSTM can help them do so.
- Our analysis of a handful of high-profile companies and a sample of mutual funds using MSCI FaCS revealed some differences within peer groups that may be useful for institutional investors.
- With the advance of technology and data analytics, we believe more investors can use factors as a tool to gain greater insights into equity portfolios.
Amazon.com Inc., Microsoft Corp., Netflix Inc. and Zoom Video Communications Inc. were all perceived winners as the world shifted to remote working and learning amid the COVID-19 pandemic. Did these stocks, so often grouped together by the media, have the same investment characteristics driving their stock prices? Well, not quite. Neither did securities in industries most negatively impacted by the COVID pandemic, such as airlines. We used factors as a magnifying glass to gain insights into the similarities and differences of these, and other, individual stocks, as well as equity portfolios.
Factors are simple attributes such as value and momentum that are intuitive and familiar to many equity investors. We can easily compare a stock or portfolio to another along factor dimensions to understand why seemingly similar stocks or portfolios may behave differently. They may also provide an important lens for portfolio analysis, due diligence and reporting to a broad audience of investors. This is the idea behind MSCI FaCS, a factor classification standard designed to provide a common language about factor exposures for stocks, indexes, ETFs and mutual funds.
Zooming in on Tech
Going back to the examples referred to above, we noted that Amazon, Microsoft, Netflix and Zoom had different MSCI FaCS exposures as of Aug. 31, 2020. For example, while all four companies had negative exposure to value, their exposures to momentum, growth and liquidity varied greatly. Zoom had the highest exposure to these three factors, while Microsoft had lower exposures to them. By looking at multiple factor dimensions, investors may be able to better understand the drivers of risk and return and communicate them clearly and objectively.
Different Factors Drove Risk and Return for Seemingly Similar Tech Firms
MSCI FaCS exposures of Amazon, Microsoft, Netflix and Zoom as of Aug. 31, 2020. The exposures are measured relative to the market-cap-weighted average of the securities in the MSCI ACWI Investable Markets Index (IMI) universe. Positive values indicate a higher exposure than the universe average, and negative values indicate an exposure below the universe average.
A Ground-Level View of Airlines
While some technology companies benefited from the accelerated pace of digital transformation, airlines faced a challenging business environment as many people avoided air travel. The four major U.S. airlines had negative exposure to growth, reflecting the difficult operating conditions. Additionally, their stock prices were under pressure, as reflected by the negative exposures to momentum and positive exposures to volatility. There were differences, however. Upon closer inspection, for example, Southwest Airlines Co. seemed to stand out from its peers along the dimensions of value, momentum, quality and growth.
Factor Differences for a Flight of Airline Stocks
MSCI FaCS exposures of American Airlines, Delta Air Lines, Southwest Airlines and United Airlines as of Aug. 31, 2020. The exposures are measured relative to the market-cap-weighted average of the securities in the MSCI ACWI IMI universe. Positive values indicate a higher exposure than the universe average, and negative values indicate an exposure below the universe average.
Were Tesla and Ford Driving in the Same Direction?
As a final example of how factors can help investors compare a company to its peers, we looked at Tesla Inc. and Ford Motor Co. Tesla recently received a lot of market attention due to its high returns and volatility. Not surprisingly, the stock had a high exposure to momentum, growth, volatility and liquidity. When we compared Tesla to Ford, a traditional automaker, we saw two very different exposure profiles, although they are in the same sector.
Tesla vs. Ford by Factor Exposures
MSCI FaCS exposures of Ford and Tesla as of Aug. 31, 2020. The exposures are measured relative to the market-cap-weighted average of the securities in the MSCI ACWI IMI universe. Positive values indicate a higher exposure than the universe average, and negative values indicate an exposure below the universe average.
Factors Helped Evaluate Mutual Funds
Factors may allow institutional investors to conduct deeper analysis of mutual funds during the due-diligence and evaluation process. We used MSCI FaCS on Funds data as of Aug. 31, 2020, to examine the exposures of a sample of growth funds. Using a simple keyword approach, we identified 178 growth funds with exposure to growth ranging from -0.39 to 0.82, and the median at 0.28.1 Surprisingly, 16 funds had negative exposure to growth despite labeling themselves as growth funds. We also noted the negative exposure of 31 funds to momentum, highlighting the difference between growth (a fundamental factor measuring earnings and sales growth) and momentum (a technical factor derived from past stock returns). When we reviewed the exposures to other factors, we saw a wide range, especially to size and quality. As a result, two randomly chosen growth funds might have very different investment characteristics, demonstrating the importance of using factors to help ensure an investment fund is consistent with a given investment objective.
‘Growth’ Funds Showed a Spectrum of Factor Exposures
MSCI FaCS exposures of a sample of 178 growth funds as of Aug. 31, 2020. The boxplot reflects the first, second and third quartiles (box) and fifth and 95th percentiles (whiskers) of the factor exposures.
Academic research has shown that factors were important and systematic sources of risk and return in equity portfolios. That’s one reason investment managers have been using them for risk management, portfolio construction and performance attribution for decades. With the advance of technology and data analytics, we believe more investors can use factors as a tool to gain greater insights into equities and equity portfolios.
The author thanks Mark Carver and George Bonne for their contributions to this blog post.
1We looked for funds with “growth” but not “value,” “income,” “dividend” or “yield” in their names. The holding data of these funds was as of July 31, 2020.