FACTORING IN STOCK DNA

Transcription

1 FOR PROFESSIONAL CLIENTS / QUALIFIED FACTORING IN STOCK DNA ishares Factor ETFs INTRODUCTION TO FACTOR INVESTING Factors capture the common behaviour of securities or markets. Certain factors have historically delivered a positive return over the long-term, compensating investors for bearing risk or capturing long-standing market anomalies. This tendency to deliver long-term outperformance versus the market made factor investing an area of interest for a variety of investors across the globe. Factor investing has historically been viewed as the domain of active managers, with the only way to gain factor exposure being through stock selection. This approach delivered the desired factor exposure but had a low level of transparency and, potentially, high turnover and costs. Over time, investors started looking for a cost efficient access to factors and other non-market capitalisation exposures and index providers began developing indices which would allow a standardised, rules based access to a variety of stand-alone or combined factors. MSCI one of the world leading equity index providers has been driving the research and development of factor indices for some of the most widely used MSCI equity benchmarks. These indices are built with the aim to achieve constant high exposure to a target factor, very low active exposure to all other factors, and a managed tracking error relative to the respective standard MSCI Index. URSULA MARCHIONI Head of ishares EMEA Equity Strategy & ETP Research [email protected] SOFIA ANTROPOVA [email protected] JAMES KINGSTON [email protected] RICHARD STEEL [email protected] REGINA ZALILOVA [email protected] CATHERINE MCNAUGHT [email protected] Development of investable factor indices precipitated further developments in the indexing area particularly the launch and growth of factor-based Exchange Traded Funds (ETFs). With the first factor ETF launched just several years ago, the interest in this segment has grown rapidly as many investors see this market as having great potential and as a next step in ETF market development and growth. The development of rule-based, standardised solutions for access to factors has introduced a new dimension in the ETF investment universe somewhere in between classic passive and active investing styles (Figure1). The factor dimension allows for a previously inaccessible set of benefits and opportunities such as access to a stock s fundamental performance and risk drivers the DNA of the stock - with transparency and low costs of an index vehicle. FIGURE 1: FACTOR-BASED INDEXING Index Funds FACTOR INDEX Active Funds Factor ETFs further broaden the range of smart beta ETFs available to the global investor. The definition of smart beta differs significantly amongst investors and usually includes non-standard index exposures and non-market capitalisation weighted benchmarks such as yield or factor-weighted indices. Despite being a small portion of the global equity ETF market around 13% AUM the smart beta equity ETF market has been growing steadily over the last two years (Figure 2) both in terms of assets under management and net new flows. FIGURE 2: GROWTH OF SMART BETA EQUITY ETFS AUM $m 350, , , , , ,000 AUM Flows 12,000 10,000 8,000 6,000 4,000 Flows $m FEES AND TRADING COSTS CAPACITY AND TRANSPARENCY MANAGER DISCRETION 50,000 0 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 2,000 0 Source: BlackRock. For illustrative purposes only. Source: BlackRock, Bloomberg, data as at June Smart beta equity ETF market includes ETFs benchmarked to non-market capitalisation weighted equity indices, i.e. factor-weighted, dividend yield-weighted, price-weighted, equal-weighted etc 1

2 FOR PROFESSIONAL CLIENTS / QUALIFIED WHAT ARE FACTORS? A factor can be thought of as any characteristic relating to a security, or a group of securities, that is important in explaining return and risk. As noted in the early CAPM 1 - related literature, the entire market can be viewed as the first and most important equity factor. Beyond this market factor, researchers generally look for factors that are persistent over time and which have strong explanatory power over the behaviour of a broad range of stocks. Since unlike stock returns, factors cannot be directly observed, there is an ongoing debate in the investment industry on how to define and estimate them. At BlackRock, within investment framework, we distinguish three types of factors driving portfolio returns: macro risk factors, style risk factors and alpha (active manager skill). Macro risk factors present non-diversifiable risks that always have a positive expected return over long-term period. Some of the factors in this category are: credit, inflation, real rates, liquidity etc. Style risk factors are stock characteristics that aim to capture a risk premium, behavioural anomaly or structural impediment. Those include low volatility, momentum, quality, value etc. Some of style risk factors, Quality, and have historically delivered a positive return over long term, compensating investors for bearing risk or capturing long-standing market anomalies 1. Alpha is an additional return that only managers with skill can deliver. Alpha can be generated through stock, country, industry selection, market timing etc. Style risk factors have always been heavily covered in the financial literature. Rosenberg and Marathe (1976) were among the first to describe the importance of style risk factors in explaining stock returns, leading to the creation of the multi-factor Barra risk models. Later, one of the best known efforts in this space came from Eugene Fama and Kenneth French in the early 1990s. Fama and French (1992, 1993) put forward a model explaining US equity market returns with three factors: the market (based on the traditional CAPM model), the size factor (large vs. small capitalization stocks) and the value factor (low vs. high book to market). The Fama-French model, which today includes Carhart s (1997) momentum factor, has become a trademark within the factor investing. The Fama-French factors are widely accepted as consistently rewarded risk factors. The aim of the original studies was to isolate asset pricing drivers in order to harness them in portfolio returns. More recently factors such as volatility, quality and momentum have also been found to influence and enhance returns. Specifically, over the longer term time periods: low volatility and high quality stocks have outperformed high volatility and low quality stocks respectively 2 ; stocks with positive recent price momentum generally outperform those with negative price momentum etc Figure 3 provides an overview of the factor exposures within the top 10 constituents of the MSCI World index. It can be seen that factor exposures can vary significantly even for stocks within the same sectors. For example, Apple is the largest stock in the index and its behaviour at the moment is primarily driven by positive growth and momentum characteristics. The pattern of behaviour of Microsoft, meanwhile, is primarily influenced by positive momentum, negative growth and low volatility. FIGURE 3: FACTOR EXPOSURES IN MSCI WORLD Top 10 stocks by market capitalisation Source: MSCI. As at 29 August STYLE AND FACTOR INVESTING THE SAME OR DIFFERENT? Historically, in order to access stocks with value and growth characteristics, many models would be assessing the stocks in the universe on the basis of selected fundamental ratios and then allocating a respective value or growth score to every stock in the universe. This is somewhat similar to the initial steps carried out in the factor index methodologies. The difference between style and factor investing would, however, come from the weighting methodology (market cap for style indices and factor-weighed for factor indices) and the subsequent steps and these can vary depending on index provider. For example, in MSCI Style indices, to ensure the sufficient size and representativeness of the respective and indices, the full stock universe would be divided in half by market capitalisation. Such an approach led to some stocks being pure (at the top range of the half ), pure (at the top range of the half ), and some ending up in a middle area (carrying characteristics of both). Due to such an approach, some of the securities were thus included in both and buckets (Figure 4). FIGURE 4: STYLE INDEX OVERVIEW Stocks Apple Inc Exon Mobil Corp Microsoft Corp Johnson & Johnson General Electric Co Weels Fargo & Co New Nestle Chevron Corp New Procter & Gamble Co JPMorgan Chase & Co exposure: 50% of the Index MC Volatility Stocks with similar / characteristics Source: 1 MSCI, Foundations of Factor Investing, J. Bender, R. Briand, D. Melas, R.A. Subramanian, December Low Risk Stocks Outperform within All Observable Markets of the World by Nardin L. Baker and Robert A. Haugen, April stocks exposure: 50% of the Index MC 2

3 FOR PROFESSIONAL CLIENTS / QUALIFIED In the MSCI Factor indices the initial steps are similar to the above. The complete stock universe of the parent index, i.e. the MSCI World index, is considered, then each stock is prescribed a score which expresses its exposure to a selected factor. After a number of intermediary steps, the stocks with the highest scores are selected for inclusion in the factor index and are factorweighted. By doing this, the allocation to stocks with exposure to other factors is minimised. FIGURE 5: FACTOR INDEX OVERVIEW factor exposure: 300 stocks with the highest score The differences between the methodologies of the style and factor indices have an impact on the performance of those benchmarks. Figure 6 below shows the historical performances of the MSCI World (parent index), MSCI World (style index) and MSCI World Enhanced Index (factor index). FIGURE 6: HISTORICAL SIMULATED PERFORMANCE OF MSCI WORLD ENHANCED VALUE (FACTOR) AND MSCI WORLD VALUE (STYLE) INDICES Aug-00 Finally, for more details please see below the table which highlights the main differences between the style and factor methodologies. TABLE 1: OVERVIEW OF STYLE AND FACTOR INDEX METHODOLOGIES Market coverage Factor coverage Weighting Rebalancing/ turnover Coverage Aug-02 Aug-04 Style index Aug-06 MSCI World Enhanced (factor index) MSCI World (style index) MSCI World (parent index) Source: Bloomberg, as at 29 August Past performance and simulated performance are not a guarantee of future results. Broad exposure to sets of characteristics; market segments are split into symmetrical components i.e. and Moderate tilt towards factor characteristics Market capitalisationweighted Lower turnover Broader subset of the parent index Factor index Focused exposure to stocks with a specific factor exposure. One particular subset of the market segment, i.e. only stocks High factor tilt Factor-weighted Higher turnover Focused subset of the parent index Source: BlackRock, Russell Investments. Bloomberg, as at July Aug-08 Aug-10 Aug-12 Aug-14 WHY FACTOR ETFS Factor indices offer a fully transparent and consistent way to passively invest in factors. Transparency alleviates the potential problem of manager style drift and should have a positive effect from both a risk management and a cost perspective. Investors have full look-through of how exposed their portfolios are to the factors and the index rules employed to capture those factors. Factor ETFs offer a straightforward and liquid way to capture indexed factor exposure. Despite being a new, and relatively small part of the global ETP market, factor ETFs offer the range of advantages of an ETF structure: diversification, transparency, liquidity, flexibility and onexchange trading. As ETFs can be accessed via both primary and secondary markets, the multiple layers of ETFs liquidity translate into a new role that factor ETFs can have in investment portfolios, more specifically offering investors the choice of shorter-term strategies in addition to longer term allocations. We will look at various portfolio strategies which incorporate factor ETFs in a variety of ways in the next chapter. THE ishares FACTOR ETFS RANGE ishares are dedicated to the development of new strategies designed to meet investors needs around the world. Our first factor ETFs were launched in the US in 2011 and, in order to meet the demand from European and global clients utilising UCITS structure, we are now launching a suite of global developed equity factor ETFs. All ishares factor ETFs are benchmarked to world leading factor indices from MSCI and offer investors transparent methodology and robust selection criteria. While many investors are familiar with the concept of factor investing, the implementation of such strategies may be a new step. ishares factor ETFs are physically replicated funds; they are managed by the industry leading portfolio management team at BlackRock, whose focus is to consistently deliver benchmark performance after fees. ishares factor ETFs offer exposure to momentum, quality, size and value factors and complement our European-domiciled range of Minimum Volatility ETFs. Figure 7 below shows how ishares factor ETFs fit within the ishares range of Equity ETFs. FIGURE 7: ishares EQUITY RANGE Broad Traditional beta Developed Regional Country /Style Currency Hedged Emerging Regional Eurozone Country Thematic Sectors Europe US Non-traditional beta Property Sustainability Commodity & Energy related sectors Private Equity, Infrastructure Shari ah Yield / Dividend Income Yield Smart beta Factors Min Vol Factor Quality Factor Factor Factor All ishares ETFs are managed by the ishares Equity Portfolio management team and benefit from BlackRock s unrivalled capabilities in portfolio and risk management. 3

4 FOR PROFESSIONAL CLIENTS / QUALIFIED IMPLEMENTATION WITH ishares FACTOR ETFS At BlackRock we do not see factor ETFs as a substitute to market cap exposures. Market capitalisation-weighted benchmarks represent both the opportunity set available to investors as well as their aggregate holdings. They are also the only reference for a truly passive buy and hold investment strategy. They aim to capture the longer-term outperformance with structurally low turnover, very high trading liquidity and extremely large investment capacity. Factor indices rebalance away from a neutral market cap starting point and as such, they represent the result of an active view or decision. This view however is implemented within a well-defined, rules-based framework determined by the index methodologies. In this section we consider five different case studies based on portfolio strategies incorporating factor ETFs. Some of these may resonate with certain client segments more than others. This is not an exhaustive list of implementation examples and we suggest clients talk to their ishares representatives to get more information as required. Incorporating factor ETFs in your portfolios 1. Express your macro views more precisely 2. Tilt portfolio to add/increase factor exposure or manage specific risk 3. Build a multi-factor ETF portfolio 4. Portfolio completion (balancing out unintended factor exposure) 5. Liquidity sleeve CASE 1: Express macro views more precisely Follow the market cycle to get the best use of factor ETFs. Liquidity and ease of trading of factor ETFs means that the factor rotation can be implemented promptly at the first sight of cycle change. Early cycle: recovery Mid cycle: slowdown Quality Late cycle: pickup CASE 2: Tilt portfolio to add/increase factor exposure or manage specific risk Contraction - recession Low Volatility Quality Reducing the volatility of the portfolio can sometimes lead to a reduction in its performance. Various factor tilts can be used to achieve various goals simultaneously reduce volatility, add returns or improve risk-adjusted returns. In this case, we have created three separate tilts to the original portfolio (MSCI World Index): Portfolio 1: Add size tilt (10%) to seek to enhance return Portfolio 2: Add low volatility tilt (10%) to seek to lower total risk Portfolio 3: Add both size (10%) and low volatility (10%) tilts to seek to improve risk adjusted returns FIGURE 8: CASE 2 - FACTOR TILTS AND PORTFOLIO SIMULATED PERFORMANCE RELATIVE TO MSCI WORLD INDEX Portfolio 1: 10% tilt 10% Portfolio 2: 10% Low volatility tilt 10% Portfolio 3: 10% and 10% low volatility tilts 10% 10% 90% 90% 80% Portfolio 1 factor exposure tilt MSCI World Portfolio 1 World World World Volatility Low Volatility tilt MSCI World Portfolio 2 Volatility For Illustrative purposes only. Index data was used to construct and analyse the performance and risk characteristics of the portfolios. Please note that the factor exposures represent standard deviations from the mean. For individual stocks they vary from approximately -3 to +3 standard deviations. For portfolios, the numbers tend to be lower in absolute terms. Typically, exposures below -0.2 and above +0.2 can be considered meaningful exposures at a portfolio level Past performance is not a guarantee of future results. Simulated past performance is not a guide to future performance tilt Low Volatility tilt MSCI World Portfolio 3 Cumulative Excess Return vs MSCI World Annualized Volatilities % % 0 8% % -3 0% 01/09 01/10 01/11 01/12 01/13 01/14 1yr 3yrs 5yrs Since 02/02/09 MSCI World with a Low Vol Tilt MSCI World with a Small Tilt MSCI World with Low Vol & Small Tilts MSCI World Source: BlackRock, MPI, Morningstar, Bloomberg. 02/02/09-31/07/14. Frequency: month. USD. % Excess Return Portfolio 2 factor exposure Portfolio 3 factor exposure 4

5 FOR PROFESSIONAL CLIENTS / QUALIFIED CASE 3: Build a multi-factor ETF portfolio Industry research into factor investing has suggested certain factors constantly deliver outperformance versus the broader market. However any individual factor can potentially be volatile and experience market underperformance in the short term. Constructing portfolios based on various combinations of these factors allows us to produce a variety of options mitigating interim volatility and reflecting different clients investment objectives. In this case we have assumed the most straightforward approach and equally-weighted each of the factor exposures in the portfolio. We consider three portfolios: Defensive portfolio: a basket of three factors low volatility, value and quality combined in order to minimise the risks. Balanced portfolio: a basket of five factors size, low volatility, momentum, value, quality. Dynamic portfolio: a basket of three factors smaller size, momentum and value combined in order to generate extra performance. Figure 9 provides more details on portfolio composition. As can be seen in figure 10 portfolio profile has direct impact on its risk and return. For example, dynamic portfolio had the strongest historical performance but carried a higher risk. FIGURE 9: MULTI FACTOR PORTFOLIOS DEFENSIVE, BALANCED, DYNAMIC Portfolio 1: Defensive Factor portfolio Volatility Nonlinearity Volatility Financial Leverage Liquidity Factor exposure Weight World Volatility 33% World 33% World Quality 33% Portfolio 2: Balanced Factor portfolio Financial Leverage Liquidity FIGURE 10: MULTI FACTOR PORTFOLIOS - SIMULATED PERFORMANCE ANALYSIS Cumulative Performance of $ Nonlinearity Portfolio 3: Dynamic Factor portfolio Factor exposure Weight World 20% World Volatility 20% World 20% World 20% World Quality 20% 01/09 01/10 01/11 01/12 01/13 01/14 07/14 Financial 12m Rolling Risk Volatility Leverage Liquidity Nonlinearity 6 2 Factor exposure Weight 01/09 01/10 01/11 01/12 01/13 01/14 07/14 World 33% World 33% Balanced Factor Portfolio World 33% Dynamic Factor Portfolio Defensive Factor Portfolio MSCI World Defensive Factor Portfolio MSCI World Balanced Factor Portfolio Dynamic Factor Portfolio Source: BlackRock, MPI, Morningstar, Bloomberg. 02/02/09-31/07/14. Frequency: month. USD. For Illustrative purposes only. Index data was used to construct and analyse the performance and risk characteristics of the portfolios. Please note that the factor exposures represent standard deviations from the mean. For individual stocks they vary from approximately -3 to +3 standard deviations. For portfolios, the numbers tend to be lower in absolute terms. Typically, exposures below -0.2 and above +0.2 can be considered meaningful exposures at a portfolio level. Past performance is not a guarantee of future results. Simulated past performance is not a guide to future performance. Total Annualized StdDev, % 5

6 FOR PROFESSIONAL CLIENTS / QUALIFIED CASE 3: Build a multi-factor ETF portfolio (continued) FIGURE 11: MULTI FACTOR PORTFOLIOS - SIMULATED PERFORMANCE ANALYSIS Annualised Performance Total annualized return 20% 16% 12% 8% 4% 0% Annualised Sharpe Ratio 2.0% 1.5% 1.0% 0.5% 0.0% 1yr 3yrs 5yrs Since 02/02/09 1yr 3yrs 5yrs Since 02/02/09 Balanced Factor Portfolio Dynamic Factor Portfolio Defensive Factor Portfolio MSCI World Source: BlackRock, MPI, Morningstar, Bloomberg. 02/02/09-31/07/14. Frequency: month. USD. For illustrative purposes only. Index data was used to construct and analyse the performance and risk characteristics of the portfolios. Please note that the factor exposures represent standard deviations from the mean. For individual stocks they vary from approximately -3 to +3 standard deviations. For portfolios, the numbers tend to be lower in absolute terms. Typically, exposures below -0.2 and above +0.2 can be considered meaningful exposures at a portfolio level. Past performance is not a guarantee of future results. Simulated past performance is not a guide to future performance. Case 3.1. Build a custom portfolio based on classic Fama-French model While case 3 is based on three portfolio scenarios leveraging factors which have historically delivered outperformance, this particular case study is based on Fama-French model s factors: the market, the size and the value factors. To accommodate for various clients requirements we have created three portfolios with different allocations towards size and value MSCI World factors. The performance of the three portfolios was then analysed versus the MSCI World index and the factor strategy ( Equity) which aimed to increase exposure to small and value companies in the context of global developed equity stock universe. As can be seen, all three custom portfolios have significantly outperformed both the benchmark and the factor strategy ( Equity). FIGURE 12: PORTFOLIO EXPOSURES 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 75% 25% 50% 50% 25% 75% Portfolio 1 Portfolio 2 Portfolio 3 World World FIGURE 13: PORTFOLIO SIMULATED PERFORMANCE ANALYSIS Source: BlackRock, MPI, Morningstar, Bloomberg. 30/01/ /07/2014. Frequency: Monthly. Currency: USD. For illustrative purposes only. Index data was used to construct and analyse the performance and risk characteristics of the portfolios. Please note that the factor exposures represent standard deviations from the mean. For individual stocks they vary from approximately -3 to +3 standard deviations. For portfolios, the numbers tend to be lower in absolute terms. Typically, exposures below and above +0.2 can be considered meaningful exposures at a portfolio level. Past performance is not a guarantee of future results. Simulated past performance is not a guide to future performance. 6

7 FOR PROFESSIONAL CLIENTS / QUALIFIED CASE 4: Portfolio completion For bottom-up global portfolios, the resulting basket may sometimes have an unintended factor tilt. Factor ETFs can be used to manage this tilt and to neutralise unintended factor exposures within the portfolio. The target portfolio (portfolio 1) has an exposure to a variety of global developed market companies with a geographical tilt towards Japan. After factor analysis was carried out, it was identified that the portfolio had an unintended bias towards stocks with higher volatility and a negative momentum factor exposure. Using factor ETFs with exposure to low volatility and high momentum stocks allowed us to neutralise the unintended factor tilt (portfolio 2) and keep the factor profile of the portfolio in line with MSCI World index. From the diversification perspective, portfolio 2 broadly maintained a desired overweight to Japanese equities but achieved a closer sector and regional profile to MSCI World index. FIGURE 14: ORIGINAL PORTFOLIO WITH UNINTENDED FACTOR TILT AND AFTER TILT CORRECTION Portfolio 1: Defensive Factor portfolio Portfolio 2: Balanced Factors portfolio 28% 21% 15% 5% 17% 34% 4% 3% Financial Leverage 23% Financial Leverage 43% Volatility 3% 3% Volatility Liquidity Liquidity Nonlinearity Europe USA Canada Pac ex Japan Japan Volatility Nonlinearity MSCI World Portfolio 1 Portfolio 2 FIGURE 15: PORTFOLIO 2 MAINTAINED DESIRED TILT AND A CLOSER SECTOR AND REGIONAL PROFILE North America Europe Pacific ex Japan Japan Israel Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities 0% 20% 40% 60% 80% 0% 5% 10% 15% 20% 25% Japan O/W - Vol & Correction Japan O/W MSCI World Source: BlackRock, MSCI. As at 31 July 2014.For Illustrative purposes only. Index data was used to construct and analyse the performance and risk characteristics of the portfolios. Please note that the factor exposures represent standard deviations from the mean. For individual stocks they vary from approximately -3 to +3 standard deviations. For portfolios, the numbers tend to be lower in absolute terms. Typically, exposures below -0.2 and above +0.2 can be considered meaningful exposures at a portfolio level.. Past performance is not a guarantee of future results. Simulated past performance is not a guide to future performance. 7

8 FOR PROFESSIONAL CLIENTS / QUALIFIED CASE 5: Manage cash effectively Factor ETFs are used as a liquidity sleeve solution for core, non-etf factor allocation. Large institutional investors have historically been using customised factor mandates to achieve a desired long-term factor(s) exposure. To ensure the factor(s) weight is in line with the strategy, factor ETFs can provide a cost-efficient and flexible liquidity sleeve solution in order to manage the deviation of the original weights over time. The current portfolio is allocated across three vehicles where two have a global equity factor exposure: active momentum manager and a Dimensional Factor fund. The third one is a low cost global equity indexed mandate. Using factor ETFs enables investors to build the liquidity sleeve around the two factor-based core allocation and the traditional mandate while minimising transaction costs during rebalancing. FIGURE 16: BUILD A LIQUIDITY SLEEVE USING FACTOR ETFs World Overlay World Overlay Dimensional fund, 35% Active Fund 25% 3% World 2% World + = Dimensional fund, 35% Active Fund 25% Equity Index mandate 40% 5% World Equity Index mandate 40% World Standard Overlay Source: BlackRock. For illustrative purposes only. 8

9 FOR PROFESSIONAL CLIENTS / QUALIFIED CONCLUSION Factor investing has historically been viewed as the domain of active managers, with the only way to gain factor exposure being through stock selection. This approach delivered the desired factor exposure but had a low level of transparency and, potentially, high turnover and costs. With development of investable factor indices, factors can now be accessed in a variety of index-based solutions, including index funds and ETFs. Factor ETFs offer a straightforward and liquid way to capture indexed factor exposure. Despite being a new and relatively small part of the global ETP market, factor ETFs offer the well-known advantages of the ETF structure: diversification, transparency, liquidity, flexibility and on-exchange trading. The multiple layers of liquidity offered by ETFs translates into a new role for factor exposures in investment portfolios. More specifically, achieving these exposures via ETFs offers investors access to factors for shorter-term strategies in addition to longer-term allocations. The combination of unique factor exposure and benefits of ETFs has led to a variety of ways the factor ETFs can be used in the investment portfolios. We have looked at various portfolio strategies that incorporate factor ETFs and are relevant for a wide range of investors. Most of the strategies are complementary to the current market capitalisation or non-etf factor investment portfolio and include such applications as portfolio tilting, building a multi-factor portfolio, portfolio completion, management of unintended factor exposure and liquidity sleeve. ishares European-domiciled factor ETFs offer exposure to momentum, quality, size and value factors and complement the range of already available ishares Minimum Volatility ETFs. 9

10 FOR PROFESSIONAL CLIENTS / QUALIFIED Index performance does not represent actual performance of any particular investment. Simulated past performance performance is not a guide to future performance. Regulatory Information BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority ('FCA'), having its registered office at 12 Throgmorton Avenue, London, EC2N 2DL, England, Tel +44 (0) , has issued this document for access by Professional Clients only and no other person should rely upon the information contained within it. For your protection, calls are usually recorded. ishares plc, ishares II plc, ishares III plc, ishares IV plc, ishares V plc, ishares VI plc and ishares VII plc (together 'the Companies') are open-ended investment companies with variable capital having segregated liability between their funds organised under the laws of Ireland and authorised by the Central Bank of Ireland. 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This common foundation did not prohibit different methods of implementation. This is why a European UCITS may be marketed in France even though the activity of such scheme would not respect rules identical to those which govern the approval of this type of product in France. This sub fund has been authorized for marketing in France by the Autorité des Marchés Financiers. Please note that the distribution of shares of some sub funds of funds is not allowed in France. This document does not constitute an offer or a solicitation in relation to the shares of the funds. For investors in Germany The Sales Prospectus and Key Investor Information Document, as well as the annual and semi-annual reports are available free of charge from Commerzbank Kaiserplatz, Frankfurt am Main, Germany. The Companies intend to fulfil the prerequisites for treatment of their sub-funds as so-called "transparent funds" pursuant to 2 and 4 of the German Investment Tax Act (Investmentsteuergesetz InvStG). 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Investment is subject to the Prospectus, Key Investor Information Document and all documents (the main/umbrella Prospectus, the Supplement[s], the latest and any previous annual and semi-annual reports of the Companies and the Memorandum and Articles of Association of the Companies) will be available in the Luxembourg, free of charge, from the offices of the Local Agent, BNP Paribas Securities Services, Luxembourg Branch 33, rue de Gasperich Howald Hesperange L-2085 Luxembourg or by visiting the website on Investors should read the fund specific risks in the Key Investor Information Document and the Company s Prospectus. For investors in Norway The funds mentioned are registered for public distribution in Norway and are authorised by Kredittilsynet, the Financial Supervisory Authority of Norway. Any application for shares in the funds is on the terms of the Prospectus, Key Investor Information Document for the Companies. Any decision to invest must be based solely on the information contained in the Company s Prospectus, Key Investor Information Document and the latest half-yearly report and unaudited accounts and/or annual report and audited accounts. Investors should read the fund specific risks in the Key Investor Information Document and the Company s Prospectus. This document is strictly confidential and may not be distributed without authorisation from BlackRock Advisors (UK) Limited. For investors in Spain The funds mentioned are registered for public distribution in Spain.The sales Prospectus has been registered with the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores ('CNMV')). The funds which are registered in the official registry of the Spanish Securities and Exchange Commission (CNMV) are ishares plc (registration number 801), ishares II plc (registration number 802) and ishares III plc (registration number 806), ishares IV plc (registration number 1402), ishares V plc (registration number 977), ishares VI plc (registration number 1091), ishares VII plc (registration number 886) and ishares (Lux) (registration number 905). The official registry, CNMV, must always be checked to see which sub funds of the funds mentioned are registered for public distribution in Spain. Any decision to invest must be based solely on the information contained in the Company s Prospectus, Key Investor Information Document and the latest half-yearly report and unaudited accounts and/or annual report and audited accounts, copies of which can be obtained free of charge at Investors should read the fund specific risks in the Key Investor Information Document and the Company s Prospectus.

11 FOR PROFESSIONAL CLIENTS / QUALIFIED For investors in Sweden The Funds mentioned herein are registered for public distribution in Sweden and are authorised by Finansinspektionen, the Swedish Financial Supervisory Authority. Any application for shares in the funds is on the terms of the Prospectus, Key Investor Information Document, for the Companies. Important information relating to the Companies is contained in the relevant Prospectus, Key Investor Information Document and other documents, copies of which can be obtained free of charge from offices of the paying agent BlackRock Investment Management (UK) Limited, Stockholm Filial Mäster Samuelsgatan 1, Box 609 S Stockholm, Sweden. Any decision to invest must be based solely on the information contained in the Company s Prospectus, Key Investor Information Document and the latest half-yearly report and unaudited accounts and/or annual report and audited accounts. Investors should read the fund specific risks in the Key Investor Information Document and the Company s Prospectus. Please note that important information about ishares V funds is available in the current prospectus and other documents that can be obtained free of charge from the paying agent BlackRock Investment Management (UK) Limited, Stockholm Filial Mäster Samuelsgatan 1, Box 609 S Stockholm, Sweden. For investors in Switzerland The distribution of the Fund in Switzerland will be exclusively made to qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006, as amended and its implementing ordinance. Accordingly, some of the Funds have not been registered with the Swiss Financial Market Supervisory Authority ( FINMA ). This document may be made available in Switzerland solely to qualified Investors. In respect of the registered funds, BlackRock Asset Management Schweiz AG, Bahnhofstrasse 39, CH-8001 Zürich, is the Swiss Representative and JPMorgan Chase Bank, National Association, Columbus, Zürich Branch, Dreikönigstrasse 21, 8002 Zurich, the Swiss Paying Agent of the Fund. The Prospectus, Key Investor Information Document, the Articles of Incorporation, the latest and any previous annual and semi-annual reports of the Fund are available free of charge from the Swiss representative. Investors should read the fund specific risks in the Key Investor Information Document and the Prospectus. For investors in the Netherlands The Companies have been notified to the Authority Financial Markets in the Dutch Financial Markets Supervision Act of Investment Institutions, regulations enacted pursuant thereto and the supervision thereunder of the Authority Financial Markets. Copies of all documents (the main/umbrella Prospectus, Key Investor Information Document, the Supplement[s], the latest and any previous annual and semi-annual reports of the Companies and the Memorandum and Articles of Association of the Companies) will be available in the Netherlands, free of charge, from the offices of the representative in the Netherlands, BlackRock Advisors (UK) Limited, Rembrandt Toren, 17th floor, Amstelplein 1, 1096 HA Amsterdam, Netherlands or by calling the Dutch representative s information request line on Any decision to invest should be based on the information contained in the Prospectus and the key investor Information Document and the latest half-yearly report and unaudited accounts and/or annual report and audited accounts. Investors should read the fund specific risks in the Key Investor Information Document and the Company s Prospectus. For investors in the UK Most of the protections provided by the UK regulatory system do not apply to the operation of the Companies, and compensation will not be available under the UK Financial Services Compensation Scheme on its default. The Companies are recognised schemes for the purposes of the Financial Services and Markets Act Any decision to invest must be based solely on the information contained in the Company s Prospectus, Key Investor Information Document and the latest half-yearly report and unaudited accounts and/or annual report and audited accounts. Investors should read the fund specific risks in the Key Investor Information Document and the Company s Prospectus. For United Arab Emirates Residents This document, and the information contained herein, does not constitute, and is not intended to constitute, a public offer of securities in the United Arab Emirates and accordingly should not be construed as such. The funds are only being offered to a limited number of sophisticated investors in the UAE who are either (a) an investment fund owned by federal or local government entities in the UAE, (b) an entity whose main object or purpose, or one of its objects, is to invest in securities and its investment in the funds would be for its own account and not for the account of its clients or (c) an investment manager with authority to make and execute investment decisions. The funds have not been approved by or licensed or registered with the UAE Central Bank, the Securities and Commodities Authority or any other relevant licensing authorities or governmental agencies in the UAE. The document is for the use of the named addressee only and should not be given or shown to any other person (other than employees, agents or consultants in connection with the addressee's consideration thereof). For Residents of the Sultanate of Oman The information contained in this document neither constitutes a public offer of securities in the Sultanate of Oman as contemplated by the Commercial Companies Law of Oman (Royal Decree 4/74) or the Capital Market Law of Oman (Royal Decree 80/98), nor does it constitute an offer to sell, or the solicitation of any offer to buy Non-Omani securities in the Sultanate of Oman as contemplated by Article 139 of the Executive Regulations to the Capital Market Law (issued by Decision No.1/2009). Additionally, this private placement memorandum is not intended to lead to the conclusion of any contract of whatsoever nature within the territory of the Sultanate of Oman. For investors in the Dubai International Financial Centre BlackRock Investment Management (UK) Limited is authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: Registered in England No For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Issued by BlackRock Advisors (UK) Limited which is regulated by the Dubai Financial Services Authority in the DIFC and authorised and regulated by the Financial Services Authority in the UK, has issued this document for access by Professional Clients and no other person should rely upon them information contained within it. The financial services to which the document relates are only available to Professional Clients. Any decision to invest must be based solely on the information contained in the Company s Prospectus, Key Investor Information Document and the latest half-yearly report and unaudited accounts and/or annual report and audited accounts. Investors should read the fund specific risks in the Key Investor Information Document and the Company s Prospectus. Restricted Investors This document is not, and under no circumstances is to be construed as an advertisement or any other step in furtherance of a public offering of shares in the United States or Canada. This document is not aimed at persons who are resident in the United States, Canada or any province or territory thereof, where the companies/securities are not authorised or registered for distribution and where no prospectus has been filed with any securities commission or regulatory authority. The companies/securities may not be acquired or owned by, or acquired with the assets of, an ERISA Plan. Risk Warnings Investment in the products mentioned in this document may not be suitable for all investors. Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. The price of the investments may go up or down and the investor may not get back the amount invested. Your income is not fixed and may fluctuate. The value of investments involving exposure to foreign currencies can be affected by exchange rate movements. We remind you that the levels and bases of, and reliefs from, taxation can change. BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. The data displayed provides summary information. Investment should be made on the basis of the relevant Prospectus which is available from the manager. In respect of the products mentioned this document is intended for information purposes only and does not constitute investment advice or an offer to sell or a solicitation of an offer to buy the securities described within. This document may not be distributed without authorisation from BlackRock Advisors (UK) Limited. Index Disclaimers ishares funds are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or any index on which such funds are based. The Prospectus contains a more detailed description of the limited relationship that MSCI has with BlackRock Advisors (UK) Limited and any related funds BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, ishares, BUILD ON BLACKROCK, SO WHAT DO I DO WITH MY MONEY and the stylized i logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. FOR MORE INFORMATION ON ishares ETFs PLEASE VISIT OUR WEBSITE AT ishares.com Austria: +49 (0) Germany: +49 (0) Netherlands: +31 (0) Switzerland: +41 (0) Denmark: +45 (0) Israel: +44 (0) Norway: +47 (0) UK: +44 (0) Finland: +358 (0) Italy: +39 (0) Spain: +34 (0) France: +33 (0) Luxembourg: +32 (0) Sweden: +46 (0)