Factor Investing: A roundup of recent analysis and developments
A divergence of views is emerging about how investors should approach factor investing. Some argue that a sophisticated, multi-factor approach should be the considered approach, whilst others suggest that a refined, single factor strategy can still produce superior returns.
Factor investing is currently a 'hot topic' amongst investors. However, industry participants are faced with a variety of potential solutions when reviewing their use in portfolio construction. Conflicting opinions are being expressed as to whether a modified single factor model can still deliver results, or whether investors should actually consider complex, multi-factor approaches. In this round-up of recent research, Savvy Investor presents the best papers exploring both sides of the argument.
In this short paper, AGF suggests that in portfolio construction, a multi-factor strategy should begin at the individual stock level.
In this 39 page report, Scientific Beta introduces their offering of single smart factor indices which give exposure to academically validated risk factors. They assert that their indices offer both significant exposure to the required factor and superior long-term risk-adjusted performance through the use of a unique High-Factor-Intensity filter.
In this 12th survey of investment market practitioners, EDHEC-Risk Institute investigates current practice amongst European investors regarding ETF and factor investing and compares these results with previous survey data in an attempt to offer some insight into developments and trends within the ETF market.
Vontobel investigates the performance of various factor-based approaches to equity investing from 1975-2018, paying close attention to fluctuating changes in investor attitude to risk and how this influences and impacts upon the returns of different factor strategies over the business cycle.
For compliance reasons, this paper is only accessible in certain geographies
Invesco discusses the utilisation of factor investing across equity portfolios with the objective of obtaining greater returns, but caveat that there can be unintended consequences of an unsophisticated approach.
Axioma compares recent events and unusual returns from specific fundamental factors with a similar period in 2007 and conclude that history isn’t repeating itself!
For compliance reasons, this paper is only accessible in the United States
Greenwich Associates 9th Annual US ETFs Study finds widespread acceptance by investors to using factor-based ETFs as part of portfolio allocations.
Lazard investigates the various factor returns across equity markets and produce a compendium of chart data to aid investors.
Scientific Beta illustrates that underperformance in factor strategies has more in common with the actual way in which factor choices and exposure are implemented, rather than the actual factor themselves.
In this paper, Style Analytics suggests that the investment community needs new tools and methods with which to compare managers and funds, and how using the right tool may assist in finding superior performance.
In this paper, the authors suggest that the low-risk (low volatility) effect still persists and may offer investors comparable returns to those employing higher risk strategies.
In this quarterly letter, GMO argues that although the biggest stocks in the US market have increased profitability significantly over the last 30 years, much of this improvement is already fully reflected in ratings.
Scientific Beta examines how their ESG approach and filters (including exclusion) are integrated into their premier product, but still offer investors the ability to implement multi-smart factor strategies without potentially sacrificing performance.