Factor Investing: Latest Thinking

Factors with Everything?

Factor investing remains at the forefront of investor thinking, particularly as it permeates from equity investing through into fixed income and beyond. Meanwhile, equity investors are considering if this is the point in the cycle when value investing makes a comeback after years of underperformance. 

In this collection of the most recent institutional thinking on factor investing, a wide range of risk factor issues are considered, ranging from adding value in bond portfolios, as an aid to market timing, and whether single or a multi-factor approach works best.

FEATURED PAPERS

Target Factor Exposure: Investment applications and solutions (FTSE Russell, 2020)

FTSE Russell extends its "Tilt" framework to encompass explicit exposure targets. It also examines the implications of this from both an investment solution and a product development perspective.

Bridging the gap between manager selection and asset allocation (Jacobi, 2020)

Jacobi explores an application of risk factors beyond security selection. This paper shows how having a common understanding of risk factors, across an organisation, can be beneficial for both asset allocation and manager selection. In particular, understanding the factor bias of different managers can inform both the manager selection process and the asset allocation process, providing a connect between the two.

THE LOW VOLATILITY FACTOR

Solvency Regulations and Low-Risk Investing: A comparison (Robeco, 2020)

Recent research from Robeco explores how solvency regulations in Europe may contribute to the existence of the low-risk anomaly documented in academic literature.

An Analysis of Factor Exposures of Minimum Variance Strategies (Qontigo, 2019)

Qontigo examines the characteristics of minimum variance strategies and their factor exposures.

Risk & Reward Q1 2020: Research and Investment Strategies (Invesco)

For compliance reasons, this paper is only accessible in certain geographies

Invesco's 50-page Risk and Reward report investigates a) factor based buy-and-hold strategy for bonds, b) how to integrate a low volatility style exposure into core equity factor investments, and c) an equity factor timing solution.

QUALITY AND VALUE FACTORS

What is Quality? (Financial Analysts Journal, 2019)

CFA Institute investigates the 'Quality' style factor in investing, and somewhat surprisingly finds that there is no commonly accepted definition of what constitutes 'Quality'.

Reports of Value's Death May Be Greatly Exaggerated (Research Affiliates, 2019)

Research Affiliates notes the significant underperformance of value investing over 12 years. Despite arguments to the contrary, it finds the prognosis that 'value investing is dead' to be wanting on a number of levels.

Factor Investing: Value (OSAM, 2020)

OSAM outlines its approach to factor investing which suggests using a composite of value factors.

Multiple Expansion May Put Value investing Back In Favor (Robeco blog, Feb 2020)

Boston Partners, Robeco's U.S. affiliate, suggests that a return to value investing could be possible in 2020.

FACTOR RETURNS OVER TIME

Improving Portfolio Diversification with Single Factor Indices (Scientific Beta, Jan 2020)

Scientific Beta suggests that asset owners can to exploit the imperfect correlation between risk factors, or try to improve conditional diversification, by considering exposures of risk factors to macroeconomic regimes.

Factor behavior through the cycle: Lessons from the Russell 1000 Index (FTSE Russell, 2019)

FTSE Russell seeks to provide investors with a nuanced framework as to how factors perform over full economic cycles.

Value, Momentum and Mean Reversion in Factor Returns (MFS IM, 2020)

MFS IM investigates the wide range of returns associated with certain factor strategies and suggests that based on the weight of historical evidence, a return to the mean is likely.

COMBINING FACTORS

Targeted Factor Exposure: How to control factor exposure benefits (FTSE Russell 2020)

FTSE Russell investigates the various ways in which factors can be combined into a single portfolio.

Dynamic Multifactor Strategies: A Macro Regime Approach (Invesco, 2020)

For compliance reasons, this paper is only accessible in certain geographies

Invesco notes the strong cyclicality found among single factors and argues that investors may be able to exploit the macro sensitivities among factors, developing dynamic rotation strategies driven by forward-looking macro regime frameworks.

OTHER PAPERS

Did corporate-credit factors offer a risk-return edge? (MSCI blog, 2020)

MSCI examines whether tilting hypothetical fixed income portfolios towards bond specific factors does benefit investors.

Factors Strategies: Avoiding off-target exposure pitfalls (FTSE Russell blog, 2020)

In this paper, FTSE Russell outlines their Tilt approach to factor investing, which aims to mitigate systematic negative exposure to particular factors, that may lead to implementation shortfall across portfolios, resulting in underperformance.

Building Global Equity Portfolios: Capturing sources of return (QMA, 2020)

QMA argues in favour of a systematic, factor-based, cross-sectional, top-down framework which combines local country and global industry exposure to increase the investable opportunity set and augment returns.