A powerful factor-based approach to managed fund performance analysis

Delta Factors is a returns-based factor analysis tool that shows you what the true underlying drivers of a managed fund’s return and risk have been over its life, so you not only can see the results the fund has delivered but also understand and explain the “why”. Delta Factors is highly intuitive, visual, fast and cost effective.

It is an essential and complementary addition to your existing fund research toolkit, enabling you to rapidly analyse years of data across 2,000+ funds, and quickly and easily assimilate and understand the results, providing valuable insights into a fund’s performance that you won’t find in other fund research subscriptions.

Delta Factors will help you create robust portfolios by deepening your understanding of the underlying factors that have truly driven a fund’s investment risk and return.

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Delta Factors is owned by Delta Factors Pty Ltd, a joint venture firm owned by Portfolio Construction Forum and investment consultant, Michael Furey, CIMA®, who developed Delta Factors for his own use over the past decade. Delta Factors is operated and managed by Portfolio Construction Forum and is entirely independent of Michael’s investment consulting company and activities.

Portfolio Construction Forum is the specialist, independent, investment continuing education, accreditation and certification service for Australian and NZ investment and wealth professionals. We provide a curriculum of live and on-demand content – at the heart of which is our multi-media library – curated for the community of professionals involved in constructing or giving advice on multi-asset, multi-manager portfolios. The Forum enables better quality portfolio construction knowledge and competence for practitioners, to help them improve the financial wellbeing of individuals.

One of Portfolio Construction Forum’s team, senior analyst, Graham Harman, supports Delta Factors subscribers. Graham was previously Director Capital Markets Research at Russell Investments, where he also held the role of Senior Investment Strategist Asia Pacific, responsible for the asset allocation of Russell’s multi-asset, multi-manager portfolios. Other roles include manager research for fixed income managers for asset consultant Towers Perrin (now part of Willis Towers Watson), Director of Quantitative Research responsible for risk and factor modelling at Citigroup. Investment management roles include Manager International Equities at IAG, responsible for direct equity investment and appointment of external fund managers, and managing an Australian equities portfolio at AMP, where he also sat on the private equity investment committee. Graham holds a B.Com (Hons) and an M.Com (Hons), both from the University of NSW, and a M.A. from Macquarie University in English literature. He has served as a lecturer at Finsia and Kaplan.

Michael Furey is a leading expert in managed fund quantitative analysis and its application to investment selection, and an experienced former financial adviser. Prior to founding his investment consulting firm, Delta Advisory, he was Head of Research for Suncorp’s financial advisory businesses including Suncorp Financial Services, Guardian Advice, and Cameron Walshe. Michael is a member of Portfolio Construction Forum’s core faculty of leading investment professionals, contributing to the Forum’s continuing education and certification programs. He holds a Masters of Applied Finance & Investment, Level 2 Accredited Derivatives Adviser (ADA), Graduate Diploma of Financial Planning, and Bachelor of Mathematics (Statistics). He is also a Certified Investment Management Analyst (CIMA®), Certified Financial Planner (CFP®), and a Senior Fellow of Financial Services Institute of Australia (SFFin).

Delta Factors is relevant for investment and wealth management practitioners (institutional or wholesale) who are engaged in designing, building and/or advising on multi-asset, multi-manager portfolios including:

• investment advisers giving investment advice on multi-manager, multi-asset funds to individual investors;
• fund researchers;
• investment consultants consulting on multi-asset, multi-manager portfolios;
• portfolio managers designing, building and managing multi-manager investment portfolios; and/or,
• members of investment committees that oversee multi-asset, multi-manager portfolios and/or funds.

And it is an essential tool for any of the above practitioners who are involved in researching managed funds and/or selecting funds for use in portfolios.

Finally, it is an invaluable tool for managed fund providers who wish to understand how the underlying drivers of the performance of their managed funds compare to those of competitors, and which funds are complementary in portfolios.

It looks at the cause AND effect of managed fund performance - Delta Factors uses return-based factor analysis to show you what the true underlying drivers of a managed fund’s return and risk have been over its life, so you not only can see the results a fund has delivered but also understand and explain the “why”.

It is an essential and complementary addition to your existing fund research toolkit - Delta Factors provides detailed, objective, time series analysis of the risk and return attributes and exposures of 2,000+ funds, including coverage of equity funds, fixed income funds, hedge funds and alternative funds, giving you valuable insights into a fund’s performance over its life that you won’t find in other fund research subscriptions (including those that use holdings-based factor analysis).

It will save you loads of time - Delta Factors is highly intuitive, visual and fast. Built on the powerful, market-leading Tableau analytics platform, Delta Factors is “click-n-go” and requires no calculations by the subscriber. You can rapidly analyse years of data across 2,000+ funds, and quickly and easily assimilate and understand the components of a fund’s performance.

It will help you build better quality multi-manager portfolios - Delta Factors can materially enhance your portfolio construction process, improving individual fund search and selection, as well as blending of funds into a portfolio.

It doesn’t cost your right arm - Delta Factors pricing is very simple and transparent, with one fee for boutique firms and one for institutions (rather than based on the number of individuals using the software). The more people you have using it at your firm, the merrier!

Over recent years, there has been a significant increase in the conversation about and use of factors (i.e. of systematic exposures) in portfolio design. There have been more products, more ETFs, more “smart beta” offerings - and much more industry discussion about factors. Holdings-based factor analysis tools are widely used in portfolio design. Returns-based factor-analysis is complementary and additive to that and has many advantages over a holdings-based approach.

Holdings-based analysis is excellent for assessing where investments are positioned today and for taking a snapshot of a portfolio’s exposures. But that strength is also a weakness - a key disadvantage of a holdings-based approach is the need for timely, cost-effective data on the constituent securities in a manager’s portfolio. And, if we want to visualise results through time, we need all the holdings through time. It’s a very expensive process and difficult if not impossible to do for all funds (even for big data providers) as it is either impossible to obtain the necessary holdings data, or it is impossible to associate factor characteristics with the holdings where known.

For these reasons, holdings-based factor analysis is only able to comprise a small part of total portfolio risk analysis.

Returns-based style analysis is a different way of understanding exposures to factors, and it can provide a great deal of additional, useful information. The returns-based concept was developed by William Sharpe^ over 30 years ago, but it is really only recently that the approach has come into its own.

Advantages of returns-based style analysis include that it is easy to calculate, requiring as inputs only factor and portfolio returns through time. It not only provides a breakdown of exposures to factors, in total and individually, but it also provides indicators of value-add and a breakdown of risk. A characteristic feature of returns-based risk analysis is that it diagnoses historic exposures through time which may differ considerably from a fund’s positioning on any given day.

As a result of its outcome-oriented approach, returns-based analysis provides an objective perspective on whether a fund adds value and in what way (alpha), whether it’s true to label (factor exposures), whether it is representative of its asset class (relationship to the market), and a breakdown of portfolio risk and trends in the components of that breakdown.

Returns-based factor analysis shows you what the true underlying drivers of a managed fund’s return and risk have been over its life, so you not only can see the results the fund has delivered but also understand and explain the “why”.

^ Sharpe, W.F., “Determining a Fund’s Effective Asset Mix”, Investment Management Review, December 1988, pp 59-69.

1. Perform fund risk analysis and risk decomposition

Delta Factors enables you to clearly visualise the composition of a managed fund’s risk and return, without requiring information about fund holdings. The overall risk and return characteristics that a fund delivers over time is comprised of a complex mixture of thematic, systematic, and manager specific drivers - and beta can easily be dressed up as or mistaken for alpha, and poor alpha can be (incorrectly) blamed on external systematic market developments (beta). Delta Factors cuts through these crosscurrents and provides a clean decomposition of a fund’s risk and return history.

2. Accurately identify investment style

You can diagnose the investment style biases and drivers present in funds over various time periods, so you don’t have to rely on what you’re told, rather you can see the reality for yourself.

3. Quickly identify funds of interest

The Delta Factors search function helps you quickly narrow down and identify, from the universe of thousands of funds, a focused sub-group with the specific risk and return characteristics you’re interested in.

4. Independently audit style drift through time

Delta Factors provides you with an independent audit of style drift through time, providing an uncompromising reality check. For example, a value style equity fund can be examined to see whether it has delivered characteristic value outcomes. An inflation-immunising fund can be examined to see whether it has actually protected investors against inflation.

5. Check the robustness of a fund’s performance

The Delta Factors time-series visuals enable you to quickly and easily check the robustness of a fund’s performance. Has a fund really delivered strong 10-year alpha? Or has it been episodic, or spread evenly and reliably throughout the entire period? Have style exposures been variable (positive and negative) or moved steadily in the right direction?

6. Gain historical performance insights at a glance

You can quickly review episodes of particular importance or interest (market downturns, the outbreak of Covid, or the Silicon Valley Bank crisis, etc). For example, has the Quality factor offered positive performance and risk protection when most needed? And what about specific funds that are represented as Quality driven? Delta Factors provides the answer.

7. Enhance your strategic investment style decision-making

By providing information relating to the historical value-add from various factors and the reliability of that value-add, Delta Factors can be a valuable input into your strategic investment style selection decisions.

8. And your tactical investment style decision-making

You can identify emerging style and factor trends, or the waning of existing trends, and also assess the value (cheap/expensive) of a wide range of fundamental, macro, regional and sector exposures. This information can be a key input into your tactical investment style selection decisions.

9. Perform market-level return analysis

You can quickly and easily identify systematic drivers and current trends for an overall market.

10. Identify latent risks in portfolios

Some funds will have embedded risks, associated with meaningful potential factor exposures that have not recently been to the forefront of market influences. You can inspect current beta and beta through time, alerting you to latent portfolio risks.

11. Discriminate between acceptable and unacceptable failure

All active fund managers will experience periods of under performance and out performance. Delta Factors helps you diagnose the reasons a manager under performed and helps inform your manager termination decisions. For example, Delta Factors will help you see whether a manager underperformed because their style was out of favour with market conditions, or whether they drifted from their promised style.

12. Compare the risk and return drivers of funds

Delta Factors provides you with easy-to-use fund comparisons, for both large and small groups funds, in an intuitive graphical format.

13. Implement and monitor your Strategic Asset Allocation and Tactical Asset Allocation decisions - and guard against unwitting errors

Delta Factors is a workhorse can sit at the heart of your portfolio construction process. Its high-level factor analysis interfaces with strategic and thematic considerations at the portfolio design level. Its very granular and detailed diagnostics for a large universe of funds substantiates your portfolio construction implementation and execution phase. And its analytical power enables you to review portfolio construction results and outcomes. Delta Factors is an effective control and monitoring tool to enable you to check that desired top-down strategy views and considerations are actually reflected in your fund selection and implementation. It can also quickly alert you when the risk and return characteristics of a fund have varied meaningfully from the risk and return characteristics of the relevant asset class.

14. Do a reality check on market outlook opinions

It’s notionally the job of the asset allocator, the portfolio construction team and/or the investment committee to consider the outlook for overall markets, while it is the role of the fund manager to add alpha relative to its benchmark. In reality, it’s common practice to look to managers for an opinion on future market directions - and managers are usually more than ready to oblige. But do their musings add any value in the portfolios? The Market Timing Beta feature of Delta Factors answers that question.

15. Easily screen for greenwashing

The virtues of green investing can often be supplanted by concerns about greenwashing. The returns-based approach of Delta Factors pays no regard to whether managers are “talking the talk”. Instead, Delta Factors allows you to diagnose whether a manager is or is not “walking the walk” in terms of ESG investing.

16. Inform your active vs style index vs broad market index decisions

Foundational decisions made when constructing multi-manager, multi-asset portfolios revolve around whether and when to invest in funds that are actively managed, style index managed or passively managed to a broad market index. Delta Factors’ close scrutiny of fund alpha, the sources of that alpha, the risks associated with that alpha, and the consistency and robustness of alpha delivery, constitutes a rich source of information for portfolio constructors.

17. Improve your investment Committee presentations

Investment Committee members often have preconceived ideas regarding equity funds and typically engage readily with the Delta Factor analysis of equity funds due to the easily digestible graphical format that provides a springboard for clear discussion. Delta Factors is just as valuable for its insights into fixed income and alternative funds where important macroeconomic exposures such as inflation, duration and credit are most notably embedded, but where Investment Committee members’ prior knowledge and understanding may need augmenting.

18. Improve your investor communications

Delta Factors will add authority and colour to your investor communications, by providing at your finger-tips facts and figures on current market drivers and relevant fund characteristics.

Delta Factors software

The Delta Factors software tool is available by subscription, exclusively through Portfolio Construction Forum. It features:

• Fund Search – Mouse-driven sliders enable you to zoom in on desired fund attributes for inclusion in portfolios, and on undesired attributes for exclusion. With just a few mouse-clicks, you can quickly narrow down the 2,000+ fund universe to a focused short-list of interest.

• Fund Analysis – Visually-displayed diagnostics are available for all Australian managed funds with more than three years history - including alpha and beta history, factor analysis, factor exposures, style contributions, risk decomposition, ESG alignment, market timing diagnostics, and leverage to inflation and credit.

• Equity Market Factor Valuations – Quickly view the factor returns of a range of equity markets, on both an annual and three-year rolling basis, including consistency, drawdowns, and outcomes during key historical episodes.

Delta Factors support

In addition, subscribers are provided with:

• Delta Factors Handbook – This is illustrated with screen shots and includes step-by-step instructions on how to recreate all the results of Delta Factors yourself using simple mouse-clicks and menu-choices.

• Further continuing education – Online video resources explaining returns-based factor analysis.

• Access to experts - Subscribers can access the Forum’s team members including investment specialists who are well versed in how to use Delta Factors to help inform multi-manager portfolio construction.

Delta Factors is available to AFS licensees, representatives of licensees, and Sophisticated Investors by quarterly subscription, payable by credit card. Your subscription has no fixed period - it carries on until you cancel it, with the caveat that you must cancel by the end of the calendar quarter (31 March, 30 June, 30 September or 31 December) as we will process your quarterly credit card payment on 1 April, 1 July, 1 October and 1 January, after which it is non-refundable. Once payment has been processed, we will send you an invoice for your records.

By using the link below to subscribe to Delta Factors, you agree you have read, understood and agree to be bound by the Delta Factors Terms and Conditions.

• Boutique firms:  $995+GST per quarter  Subscribe now

• Corporates:  $2,495+GST per quarter  Subscribe now

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This free trial offer is available to new subscribers who’ve not previously had a free trial or subscription to Delta Factors.

• Use the link above to send us your details. We’ll contact you via phone to obtain your credit card details and charge A$1 to your card to check it’s valid.
• You’ll pay nothing further until the first day of the next calendar quarter (e.g. if you subscribe in October, you will not be charged the quarterly subscription fee until 1 January). If you don’t wish to proceed, simply contact us before the first day of the next calendar quarter and we will cancel your subscription without further charging your card.