Mercer | Building Equity Portfolios With Style

Mercer believes that it is important to focus on the underlying drivers of return and how this can help investors with constructing and monitoring their portfolios.

Investments

Building Equity Portfolios with Style

Much has been written recently about 'smart beta,' 'advanced beta,' 'intelligent indexing,' and various other buzzwords — broad terms that are not always well-defined. Looking beneath these catchy titles, Mercer believes that it is important to focus on the underlying drivers of return and how this can help investors with constructing and monitoring their portfolios. We have been helping clients implement equity structures with explicit allocations to style factors for many years. This short paper serves as a primer on approaches to capturing a range of return drivers in global equity portfolios.

To which return drivers should investors seek exposure?

The simple answer is that investors should seek exposure to those drivers of return that they believe will outperform (either in absolute or risk-adjusted terms) over the long term. So, which drivers are likely to outperform? This is, of course, a vexed question on which commentators, market practitioners, and academics will not always agree. At Mercer, we are wary of claims that certain return drivers are 'academically proven' to outperform ('proven' is a dangerous word to use in the investment industry, particularly in relation to the future). Nevertheless, there is evidence — both empirical and economic rationale — that can be used to assess whether a given return driver is likely to outperform in the future.

Mercer believes that investors should consider a positive bias toward the drivers of value, size, momentum, low volatility, and profitability

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