Launch of the Endowus Factor Portfolios by Dimensional
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Launch of the Endowus Factor Portfolios by Dimensional

Feb 2023
Feb 2022
factor-based investing - Endowus Factor Portfolios by Dimensional
  • We are excited to share the launch of the Endowus Factor Portfolios, a new set of Core portfolios available across the risk spectrum with exposure to global equities and fixed income. The launch is in partnership with Dimensional Fund Advisors (DFA), a global leader and pioneer in systematic factor-based investing that manages assets of more than S$900 billion. 
  • The new Factor Portfolios by Dimensional gain systematic and diversified exposure to the long-term proven factors of returns, such as value, size, and profitability in equities, and term and credit in fixed income, through best-in-class funds managed by Dimensional. 
  • Diversification is critical to long-term risk-adjusted returns and investor success. These portfolios are globally diversified across more than 10,000 stocks in 43 markets, and almost 900 government and corporate fixed income securities. 
  • Endowus takes an evidence-based approach to investing for the highest probability of success, which brings together strategic passive asset allocation and global diversification, at a low cost. We use these building blocks to design portfolios customised to your goals and preferences.
  • Endowus has worked with Dimensional strategically since our launch. To enable the Endowus-designed Factor Portfolios, we have launched two new funds with Dimensional — the Emerging Market Sustainable Equities and the US Core Equities funds — which are now available to retail and accredited investors for the first time in Singapore.
  • The new Factor Portfolios by Dimensional are managed in a discretionary manner by the Endowus Investment Office. This means that investors can rely on Endowus’ expertise to monitor, automatically rebalance and optimise the funds and weights so that your portfolio delivers the highest risk-adjusted returns for your intended goal and risk. 
  • The Factor Portfolios are currently available for existing clients, and can be funded by cash or SRS monies. Initial investments start from $100.

Why factor-based investing? 

Factor investing is about investing in securities featuring certain characteristics that have proven to deliver higher risk-adjusted returns than the market over time, following a fixed set of quantitative rules.

In other words, it is based on the systematic exploitation of a number of risk premiums, called factor premiums, that have shown to be robust over time and across different markets. 

Factor investing is a type of investment strategy designed to systematically gain exposure to such a set of factors through a purely quantitative process, with no qualitative overlay. 

A rich universe of academic research, dating back to the ground-breaking three-factor model by Nobel Laureate Dr. Fama and his colleague Dr. French, have shown that there are pervasive, persistent, and proven factors that drive the future returns of specific asset classes. 

In equities, they are factors such as: 

  • Value: Cheaper companies as measured by valuation metrics such as price-to-book ratios tend to outperform more expensive companies.
  • Size: Companies with smaller market caps tend to outperform those with larger market caps.
  • Quality: Companies of higher quality, measured by metrics such as profitability margin, tend to outperform  lower-quality companies.
Size, value and profitability meaningfully outperform various benchmark equity index returns over the long term

In fixed income, they are factors such as: 

  • Term: Bonds with different maturities but similar credit qualities have different expected returns and therefore should be traded depending on the shape of their yield curves.
  • Credit: Bonds with similar maturities but different credit qualities have different expected returns and therefore should be traded depending on credit spreads.

Factor-based strategies generally offer diversified exposure to the markets, but instead of using market-cap-based weights such as traditional market indices, they emphasise parts of the market with higher expected returns through exposing the portfolio or tilting them towards these proven factor premiums. 

Factor-based strategies are attractive to investors because they offer low-cost access to broad markets that provide a base layer of expected returns from market returns (or “beta”). On top of that, they gain exposure to the proven factors of returns.

Hence, sometimes factor investing is also termed ”smart beta” or “strategic beta”. This is to distinguish itself from alpha-seeking, or purely active strategies, which are mostly qualitative and concentrated in nature, seeking to deliver returns above market beta. 

why diversification matters

How did Endowus build the Factor Portfolios? 

The Endowus Factor Portfolios are a good middle ground between passive and active strategies. They are built off a systematic, rules-based process, and offer largely passive, broad market exposure, but tilt towards proven factors of returns. Their costs are as low as that for passive strategies as well — great for cost-conscious investors.

Endowus Factor Portfolios across the equities/fixed income risk spectrum

Endowus factor Portfolios Allocation

Funds offered by Dimensional are tilted towards academically proven factors of returns that drive long-term outperformance, including value, size, and profitability.

Seven of the best-in-class funds from Dimensional are included in the Endowus Factor Portfolios. They include two newly incorporated SGD share classes of the US Core Equity Fund and the Emerging Markets Sustainability Core Equities Fund. Launched in Singapore and seeded by Endowus, they are now available to Endowus clients at launch.

The two additional funds in our Endowus Factor Portfolios create more diversified and robust global portfolios that balance the geographic and sectoral diversification with further diversifying exposure to various factors of returns. 

Factor tilts of Endowus Portfolios and underlying funds

Covariance between the different funds, which represent distinct asset classes such as the developed equities market and emerging equities market, is another important input we take when optimising the portfolios. By combining the less correlated asset classes together, we are able to deliver better risk-adjusted return at the portfolio level. 

Diversifying asset classes used

Finally, the portfolios are offered across a risk spectrum between equities and fixed income asset classes to suit different investors’ risk tolerance and investment horizon. 

A different view of markets

Why Dimensional Fund Advisors? 

Endowus has worked with Dimensional Fund Advisors strategically since our launch and we have now seeded and launched two new funds with Dimensional to bring about the Endowus-designed Factor Portfolios.

Dimensional has grown from its humble beginnings as a pioneer of factor-based investing more than 40 years ago, to being the leading provider of factor-based investing with products across equities and fixed income with global assets of in excess of S$900 billion. 

Grounded in economic theory and backed by decades of empirical research, Dimensional believes that security prices contain reliable information about systematic differences in expected returns among securities, and its mission is to identify long-term, short-term, and intra-day drivers of expected returns and to implement strategies pursuing higher expected returns. They have a high-calibre research committee, with members including academics such as Nobel Prize winners Eugene Fama and Robert Merton, as well as Professor Robert Novy-Marx, which continually works to examine new academic evidence on drivers of expected returns in different markets, and to refine and improve the investment process.  

A heritage of research at Dimensional

In the world of factor investing, the devil is in the details — it is about squeezing out the extra basis points of expected return by making the current implementation more efficient, or by discovering new information about the market.

Every step matters, from portfolio design to management to trading. Dimensional’s decades of focus on factor investing, its deep ties to the academic world, and the size of its platform, provide it with unrivalled advantage across the whole “value chain”.

We believe that in the current landscape of factor investing, Dimensional offers a highly sophisticated and efficient process. 

Like Endowus, Dimensional is a believer and advocate for low and fair fees when it comes to investing. Traditionally, their funds were only accessible by large institutional investors.

Therefore, partnering with Dimensional and making their institutional grade, high quality and low-cost products accessible to retail clients in Singapore is a meaningful next step for Endowus. 

Refer to this article on Dimensional Fund Advisors to learn more.

Owning the whole market but systematically tilting towards proven factors

How do the Factor Portfolios compare to other Core Portfolios like Flagship and ESG?

The key differentiator for the Factor Portfolios is the purely factor-based investing process that is implemented systematically by Dimensional.

While the Flagship Portfolios have some Dimensional funds included in the portfolio, it also has purely passive funds for equities and some actively managed funds for fixed income, and is designed to more passively track the global indexes. The Factor Portfolios also offer broad market exposure, but with quantitative and rules-based tilts towards proven factors of returns.

The Factor Portfolios, like Flagship and ESG, make up a Core offering designed by the Endowus Investment Office, meaning they have multi-asset exposures across the equities and fixed-income risk spectrum.

All Core offerings provide investors with a broad global market exposure that is commensurate with the broadest industry benchmark indexes. These are the MSCI All Country World Index (ACWI) for equities and the Bloomberg Global Aggregate Index for fixed income.

The Factor Portfolios are also managed on a discretionary basis by the Endowus Investment Office.

How should a client choose between Flagship, ESG, and Factor Portfolios?

Any and all of the three Core strategies can be the mainstay or the only exposure to markets for an individual client’s portfolio allocation. They all represent broad diversified market exposure. 

The other quality of Core strategies is that they are not only diversified, but also allow for a multi-asset mix of equities and fixed income that specifically targets risk levels appropriate for clients. This client suitability will result in clients choosing an asset allocation framework that targets risk (volatility measured by standard deviations or downside risk measured by maximum drawdown, among other things) appropriate for clients. It is also why they are called “target risk” portfolios. 

They also all espouse a strategic and passive approach to asset allocation —so being globally/sectorally diversified is important and the portfolios are made “efficient” across the risk spectrum to maximise the returns for each unit of risk taken. 

All of these portfolios are also multi-manager in approach, and utilising the expertise of the best will need to be mapped against your risk or personal preference.

The choice comes down to your belief in the extent of market efficiency, the purpose of your investment, and your investment priorities and risk appetite. 

Flagship portfolios are designed to be hybrid models where we utilise the best available funds with the lack of passive options available in Singapore. Through our passive and strategic asset allocation, we can overcome the constraints. Our equities portfolio only has pure passive, index-tracking strategies and Dimensional’s factor-based strategies. However, for fixed income, we have a more diversified and more active approach as the fixed income market has no passive options here in Singapore, and the active strategies by the best fixed income investors have proven to add value and alpha over the long term. 

Endowus ESG Portfolios are target risk portfolios, and are multi-asset as well as multi-manager like the other Core portfolios. However, it sits in a unique position. While its investment style is active by nature, it is also a value-driven process of investing. Within ESG investing, while the predominant and preferred method is to be an actively managed strategy, it is possible to also implement a passive (indexed) strategy.

Some people are calling ESG investing a factor as well, although we would hesitate to call it that. The decision to invest in an ESG portfolio is a preference to gain exposure to pure ESG “factors” (for lack of a better word) in order to generate market returns or above market returns.

The range of investor’s preference could be from expressing values without sacrificing returns, to investing based on a belief that ESG investing will lead to better outcomes not only for the world but also in terms of financial returns, as these companies will be long-term winners and generate better returns. 

How are Endowus discretionary portfolios different?

Endowus does not engage in market timing and our asset allocation is always long-term and strategic. We are definitely not providing discretionary management to do active or tactical asset allocation, distinguishing ourselves from some of the other robo-advisors or other fund managers.

The portfolios will be managed in exactly the same way as our other Core portfolios — with strategic and passive asset allocation — with limited changes or rebalancing occurring.

However, instead of requiring the investor to check their notifications and approve the recommended portfolio change, we are able to make the change for the client to be more efficient.

This is the key. At Endowus, a discretionary method allows us to more efficiently help our clients to upgrade their current investment portfolios if we find better or lower cost funds that can add value to the existing portfolio. This could mean upgrading products or solutions that will enhance the efficiency, risk/return profile or reduce the cost of the portfolio.

We would still provide a high level of transparency to any portfolio changes that happen, but clients don’t have to go through the cumbersome process of accepting the changes on our platform. Instead, they would give Endowus their trust and let us execute for them directly. 

We will never make unilateral changes to the asset allocation in a meaningful way or deviate away from a passive asset allocation meant to provide global diversification, by allocating to random countries, sectors or themes at any time.

Notification ahead of any changes, full transparency in the changes made and communications through email and in-app will be made, so that our clients will be fully aware of any changes made to our portfolios, whether large or small. 

To get started with Endowus, click here.

Next on the Endowus Fin.Lit Academy

Read the next article in the curriculum: Learn about Endowus Fund Smart


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