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Factor Timing, Factor Valuations and Smart Beta Forecasts

  • Posted by: ,  Chief Executive
  • 27 February 2018
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Factor Timing, Factor Valuations and Smart Beta Forecasts

Should investors try to time their exposure to different factors? Some managers, such as Research Affiliates, take the view that "valuations matter". SSGA provides a quarterly analysis of factor valuations, in order to generate its smart beta forecasts.

Other researchers argue that persistent, long-term exposure to factors is the key to success. Robeco warns that adverse timing can wipe out the potential returns from factor investing, so "strong hands" and patient minds are needed for success.

Savvy Investor

Strong hands needed to unlock potential of factor investing (Robeco, Dec 2017)
Robeco attempts to dissuade investors from factor timing, recommending instead the use of 'strong hands' (patience and persistent style exposures) to get the most out of factor investing. 

Long Term Smart Beta Forecasts (SSGA, Jan 2018)
SSGA evaluates current factor valuations and historical return premiums in order to come up with excess return expectations and to form their total return Smart Beta forecasts.

How active managers are using factor strategies (BlackRock, 2017)
(For compliance reasons, this paper is only accessible in the USA)
Via 3 case studies, BlackRock shows how institutional investors can potentially boost returns, reduce risk, and diversify their portfolios by utilising factors within their investment processes. 

Should You Care About Valuations in Low Vol Strategies? (Intech Investments)
(For compliance reasons, this paper is only accessible in certain geographies)
Intech looks at low vol strategies and the risks that are involved in implementing them, finding that although it is perilous to attempt to time the market, a strategic low volatility allocation may have merit in some instances. 

Nine academics on smart beta and factor investing (Robeco, 2018)
Robeco presents interviews with 9 of the top academics and industry experts on the topic of factor investing, taking the reader from a foundational understanding of factors to a broader appreciation of current issues within this industry.

Forecasting Factor and Smart Beta Returns - Research Affiliates, 2017
This 16-page paper by Research Affiliates discusses how to forecast factor and smart beta returns. The authors argue that using past performance to forecast future performance is likely to disappoint.

Contrarian Factor Timing is Deceptively Difficult (AQR Capital Management, 2017)
AQR Capital Management examines factor timing, whether the popularity of factor investing has led to over-valuation, and if some factors could be ripe for a bit of mean reversion. 

The Promises and Pitfalls of Factor Timing (Jacobs Levy Center, 2017)
This paper examines predictors of market sentiment and economic conditions in order to look at the promises of factor timing and problems such as data mining, variations in correlations, and externalities.

Choosing a 'Smart Beta' Factor - Not Which, But When (Northern Trust, 2015)
Recent research shows that rather than asking about which factor should be chosen, investors should ask about when they should favor each factor in order to reap the benefits of factor-based investing.

Factor investing challenges: factor timing (Robeco, Aug 2017)
Can factor exposures be timed well and tactically adjusted, with positive results?  The rise of factor investing and smart beta strategies has led investors to question when and how they should be implemented within portfolios.

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