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U.S. Factor Defensive Equity

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Newfound’s U.S. Factor Defensive Equity seeks to provide turnkey access – and harness the excess return potential – of a diversified set of well documented investment styles in a disciplined risk management framework that seeks to avoid significant drawdowns.

Equity factors include value, size, momentum, low volatility, and dividend growth.

A tearsheet and brochure for the U.S. Factor Defensive Equity strategy are available in our document center.


With valuations for core U.S. equities at historically elevated levels, we believe that expected forward returns will be significantly depressed.  In such an environment, we believe that any excess returns that can be generated play a far more significant role in elevating total return.

When Newfound’s quantitative trend-following models indicate increased risk of loss across core U.S. equity sectors, a short-term Treasury position may be introduced.

While each factor has historically exhibited risk-adjusted outperformance relative to broad markets, short-term relative performance can be volatile. The portfolio embraces a diversified and risk-balanced approach to factor investing in effort to smooth out relative performance.

Newfound’s U.S. Factor Defensive Equity strategy is available as a separately managed account, on most major TAMPs, and in model delivery format.

Questions & Answers

Smart Beta – or Factor – investing is an approach where a manager systematically tilts their portfolio away from a traditional market capitalization weighted approach in order to gain exposure to a particular category or style of stock that he believes will create excess return or reduce risk over time.  For example, over-weighting undervalued stocks and under-weighting overvalued stocks would create a tilt towards the value factor.  Other academically supported factors include size, momentum, low volatility, and dividend growth.

We invest in exchange traded funds (ETFs) representing the equity factor tilts we wish to incorporate.  We utilize ETFs as the building blocks of its portfolios because they are a transparent, cost-effective, and highly liquid means of gaining and managing exposure to particular asset classes and market sectors.

This strategy has the flexibility to invest 100% of the portfolio in short-term U.S. Treasuries in effort to avoid significant drawdowns.  The systematic mechanism we employ to dictate this decision is based upon the number of primary U.S. equity sectors (e.g. financials, utilities, consumer staples, et cetera) exhibiting negative trends.  When more than 5 of the 9 sectors begin exhibiting negative trends – what we believe is a sign of more systematic risks – the portfolio will begin to build a defensive position.

The portfolio is evaluated on a weekly basis.  In stable market environments, we expect to make few, if any, portfolio changes; in higher risk environments we expect to trade the portfolio more frequently in effort to keep up with changing market dynamics.

Investment Ideas

Manage Risk

The strategy employs a trend-following based dynamic hedging strategy.  For investors concerned about equity market volatility, this portfolio can be employed to provide access to equity market growth without necessarily exposing them to the full potential of market drawdowns.

Go Beyond Styleboxes

Traditional investment approaches put investors into a box.  Recent academic evidence suggests that factor tilts can be a far more effective means of accessing the potential for generating excess returns – and often at lower costs than traditional active managers.

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