Making the right core allocation stands out among an advisor’s many responsibilities. Core allocations may not be the most interesting parts of a portfolio. However, they do a lot of the heavy lifting for portfolios. That so many core strategies involve simple index funds does not help with core allocations’ reputation, either. Given their importance, it behooves investors and advisors to refresh their outlooks on core allocations. From time to time, they should even consider strategies that leverage alpha insights gained from non-traditional factors.
Fidelity Investments, for example, looks to set itself apart in the core space through its Enhanced ETFs. This leverages the firm’s broad data reach and proprietary approaches in building factors. While Fidelity uses value, quality, momentum, and growth factors in these core strategies, it also adds other non-traditional factors. It combines those diversified factor inputs to identify attractive firms and build a portfolio seeking long-term outperformance potential across a variety of market environments.
Each of those more traditional views like quality or value factors help, of course. Value looks for those firms with an attractive valuation compared to their fundamentals, while quality looks for those profitable firms with strong balance sheets. Fidelity takes it one step further by leveraging factor definitions beyond what is found in a textbook.
Specifically talking about non-traditional factors as part of a core allocation, Fidelity Investments looks for stock characteristics uncorrelated to traditional financial statements, earnings, and price information, adding a differentiated perspective to help identify attractive companies. By considering non-traditional data sources from options and securities lending markets, as an example, Fidelity can add more diverse insights to its core allocations. What’s more, under this non-traditional view, the firm’s investment approach also uses AI to reinforce select factors.
Weighting Other Factors
However, it’s not just using factors; it’s providing additional perspective on those views. Fidelity also weights factors based on long-term characteristics specific to a strategy’s investment universe.
Taking a non-traditional view on core allocations can help offer a fresh viewpoint on what can be a staid part of portfolios. For investors and advisors looking to revisit their core allocations ahead of 2024, Fidelity Investments’ Enhanced ETFs may merit a closer look.
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