05 Mar Factor Investing
Key takeaways from luncheon on Factor Investing For Institutional Investors:
- Smart Beta strategies and products have been the talk of the town for the past 2 years. Today we talked about a form of factor investing which has been positioned as an enhanced version of Smart Beta.
- Traditionally investors have been allocating to asset classes but have seen how correlations of different asset classes converge during periods of stress (e.g. 2009 Global Financial Crisis). The intended benefits of diversification obviously disappeared as almost every asset class fell together. (on a side note: trend following strategies performed well during this period and produced crisis alpha.)
- A study for Norwegian reserve fund by Ang, Goetzmann and Schaeter (2009) showed the active management did produce added value but it does not reflect true skill (alpha) but instead can be explained by implicit exposures to systematic factors (betas). I have not personally read this paper.
- Factor investing is a blend of passive investing (rule based and transparent implementation) and active management (active return).
- Empirical evidence for factor investing supported by economic reasoning for some of the common factors. This increases our conviction of the sustainability of the factor returns.
- Ways to enhance the implementation of common factors such as value, low-volatility and momentum were presented. These enhancements were refreshing methodologies and insightful.
Factor allocation does make a lot of sense to achieve diversification especially during periods of stress. It may be slow for the idea to gain traction in the institutional investing community but that does not mean we are not keen.