Germany-based asset management firm StarCapital has brought an new multifactor strategy to the market with its STARS Multi-Faktor fund, deploying the new generation of factor ETFs for the first time.
The ETF-based fund aims to utilise various sources of return systematically through factor ETFs during different market and economic cycles. “Factor premiums can generate outperformance against the broader stock market in the long term, but the challenge lies in allocating the right factors at the right time in order to exploit the sources of return efficiently,” says fund manager Markus Kaiser, who launched the first ETF-based fund of funds in Germany in 2007.
With the STARS Multi-Faktor fund, the fund manager focuses for the first time on an active factor rotation while controlling the equity ratio of the portfolio. The new strategy is based on the results of more than 20,000 test series, which first measured whether and over which time period a factor-based index could show a positive trend. The trend strength of each separate factor index was also tested in order to be able to systematically select those indices whose trends were both positive and strong. Using factor rotation, the long-term return is supposed to increase compared with an equally weighted factor combination and simultaneously enhance the risk profile.
To manage the equity exposure, the trend-following STARS model is applied, which Kaiser has successfully used for more than 15 years and constantly refined. The equity ratio is managed dynamically between 0 per cent and 100 per cent. “Active rules-based risk management allows for a significant reduction in the maximum drawdown of the equity investment and the stability of the portfolio’s return is improved significantly,” Kaiser explains. For example, the portfolio was still in divestment mode during the very volatile market environment in February because none of the factors showed a positive trend anymore. Since the beginning of March, the ETF strategy has had an equity exposure of 30 per cent. Minimum-volatility ETFs, in particular, which focus on shares with lower volatility characteristics than the broader stock market, have held their ground better in the turbulent market conditions since the start of this year than the classic ETFs that are based on market capitalisation.
The investment universe includes about 100 smart beta ETFs, which provide global and regional exposure to equities with various factors, including dividends, buybacks, value, growth, quality, size, minimum volatility and momentum. Markus Kaiser is convinced that the supply of factor ETFs will continue to grow in the medium term: “The smart beta concepts are promising and allow for the targeted use of particular investment styles. Similar to what we have seen for classic ETFs, we will witness strong growth rates and new approaches here in the future.” This is already evident in the increasing number of foreign fund providers pushing their way into the german market and focusing on the development of the new ETF generation.
StarCapital designed the ETF-based multi-factor strategy for investors who wish to position themselves flexibly in different market and economic cycles and invest specifically in factor premiums. Institutional investors, in particular, who do not engage in in-house asset allocation, and private investors should be interested in the new strategy. Investors can gain access to the STARS Multifactor fund in Share Class A, without initial charges or a minimum investment amount. Share Class I is open to investors who commit a minimum amount of 100,000 euros. The fund is authorised for distribution in Germany and Luxembourg.
“With the attractive fee structure, we wish to approach not just institutional investors, but increasingly also advisors and private investors, who prefer standardised asset management and are especially attracted to ETF-based solutions,” says Kaiser.