FlexShares’ Focus On Outcomes

November 08, 2019

FlexShares recently launched ETFs that offer exposure to the quality and low volatility factors. What makes those two factors go together?
We have a history of leveraging the same factors in institutional portfolios, for a fairly long time.

And what we find is that, particularly within market cycles that are so unpredictable, there are a lot of situations where investors want to remain invested in equities but are relatively nervous. So those defensive characteristics are important.For example, in looking back over the long term, you’ll find that companies that have strong valuation characteristics would be either on top or on the bottom performance wise. Pairing low volatility with the quality factor smooths this out.

To be a value investor, you sometimes need to have guts to be able to stay invested that way a long time. Quality is really in that camp, too. But the longer view you take, the better the characteristics. The same is true of low volatility. And the quality factor is a good tool to mitigate the future volatility as well.

We’re in an unprecedented period regarding fixed income. How do you think Northern Trust’s fixed income lineup addresses the kinds of problems investors are seeing in the fixed income space right now?
All fixed income investors know that probably one of the best predictors of returns from fixed income is the long-term yields.

We recognize that many investors still want to rely on fixed income assets for their income generation. They still want to have those defensive characteristics and risk management characteristics that come from having fixed income that generates the yield and return. We have a lineup that, to a degree, addresses this. But we also recognize that fixed income can be thought of in a different fashion.

One specific example, which I think is pretty unique to us, is the FlexShares High Yield Value-Scored Bond Index Fund (HYGV). We really think about high yield as more equivalent to lower-risk equities than the highest-risk fixed income. High yield bonds definitely are more volatile than what most investors who want to own return streams from Treasuries or highly rated corporate debt are willing to withstand.

The traditional funds that are focusing on high yield bonds often emphasize the higher credit aspect of high yield, which means that they give up some of the yield component. We have decided, through our empirical work, to focus on the higher yield portion of the high yield. If you look across the credit spectrum, it skews toward the lower end. We think it’s a very additive, very incremental product that’s also very unique in its positioning. 


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