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Trying to solve the equity enigma

The case for a multi-manager approach


October 22, 2019

We believe that having a multi-manager approach creates a resilient equity portfolio — a portfolio able to perform well in different market conditions over the long term.

There’s a growing spread in the performance between growth and value.

How’s your equity portfolio doing these days? While most remain firmly in the black this year, the start of August will likely have set you back a few percentage points and has increasingly made many investors nervous of the landscape ahead. While equity markets have reached all-time highs in recent months, the outlook feels quite uncertain: economic growth is showing signs of a slowdown in some markets; the business cycle appears to be in its late stage, and trade policies are keeping investors on edge. To complicate matters further, investors have seen an increasing divergence in performance between growth and value investment styles (Figure below), testing the patience of some and making others wonder how long this will really last?

Cumulative performance of the MSCI World Growth and Value Indexes
Cumulative performance of the MSCI World Growth and Value Indexes

January 1, 2017, to September 30, 2019
Note: Past performance is not a reliable indicator of future returns.
Source: MSCI, as at September 30, 2019, in USD.

Factors are forces that drive market returns. Common factors include investment style, geography, sector and market capitalisation size.

So what should asset owners do with their equity investments in such an environment? The equity enigma has yet to be solved, as consistently timing the market is almost impossible and we feel rarely achieves an attractive return over the long term. We believe the best approach is to avoid factor exposures dominating your equity portfolio. Given investors cannot consistently predict what style, geography, sector or size will drive market returns, your portfolio should aim to avoid these risks where possible.

Our philosophy to equity investing embodies this by reducing factor biases to manage risk relative to the benchmark — focusing on the strengths of skilled active managers to simply pick good stock. 

Factors go in and out of favour over market cycles.

These managers’ strategies, although individually risky, have higher return expectations given the concentrated and differentiated nature of their mandate. Total portfolio risk can be diversified by combining many of these managers while aiming to keep the alpha potential of their stock selection.

Factors go in and out of favour over market cycles, and trying to anticipate which one will do well at a given time is difficult, if not impossible. We therefore believe that having a multi-manager approach, where each underlying manager has a differentiated strategy and invest in their best 10 to 20 stock ideas, allows them to build a resilient equity portfolio – a portfolio able to perform well in different market conditions over the long term.


Towers Watson Limited (trading as Willis Towers Watson) has prepared this material for general information purposes only and it should not be considered a substitute for specific professional advice. In particular, its contents are not intended by Towers Watson Limited to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. As such, this material should not be relied upon for investment or other financial decisions and no such decisions should be taken on the basis of its contents without seeking specific advice.

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Towers Watson Limited of Watson House, London Road, Reigate, Surrey, RH2 9PQ is authorised and regulated by the Financial Conduct Authority (FCA) in the United Kingdom. Our FCA register number is 432886. You can check this on the FCA’s register by visiting the FCA’s website or by contacting the FCA on 0800 111 6768 or at 12 Endeavour Square, London, E20 1JN.


Harriet Goulding
Senior Director, Great Britain

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