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As portfolio managers of Robeco Conservative Equities, we want to place our role into a historical perspective and learn from the history of financial markets, and mutual funds in particular. History teaches us that good ideas do not necessarily guarantee successful funds. Timing is everything. Still, capital protection, high income and low turnover are timeless factors that are still relevant today.
Recently a new factor was added to the literature: Quality. In credits, we see Quality as a natural extension of pure Low-Risk. All our credit factor models have used Quality since inception, and have expanded its use over the years.
Investors are worried about the high valuations of stocks in general and low-volatility stocks in particular. And so are we! In relative terms, low-volatility stocks have become more expensive during the last two years, but it’s not the first time. It happened first in 2008 and again in 2011.
Smart beta indices are a popular way of implementing a factor investing strategy. However, research suggests that this may not the best way, as the factor exposure provided by popular smart beta strategies varies greatly and they do not unlock the full potential of factor premiums.
We provide empirical evidence that the Size, Low-Risk, Value and Momentum factors have significant risk-adjusted returns in the corporate bond market. By combining these factors in a multi-factor portfolio, drawdowns and tracking error vs. the market are reduced, while the higher return and Sharpe ratio are preserved.
The poor long-term live performance of the first generation of value indices indicates that capturing the value premium is not easy. This does not mean, however, that the value premium is beyond the reach of investors. We argue that a value premium still exists, but that harvesting it requires an approach that is much more sophisticated than simply following a straightforward value index.
Some argue that the mere mechanism of rebalancing increases returns, and that this explains the success of factor investment strategies. Although factor strategies do need rebalancing to maintain their exposures, there are several reasons why it is unlikely that this is their source of added value.
Generic strategies designed to harvest a certain factor premium regularly conflict with other factor premiums. We find that the premiums associated with these strategies tend to shrink, sometimes even to zero, in these periods of factor disagreement. But enhanced factor strategies avoid stocks that are unattractive on other established factors and continue to deliver when generic factor strategies struggle.
There is a shift towards allocating to the factor premiums momentum, value and low volatility. However, since common factor indexes are a suboptimal way to harvest factor premiums, this paper shows the improved results of a more sophisticated approach. Factor strategies developed by Robeco lead to higher returns, while lowering the risks, resulting in higher Sharpe ratios.
Investors increasingly embrace “smart beta” investing, by which we mean passively following an index in which stock weights are not proportional to their market capitalizations, but based on some alternative weighting scheme. Examples include fundamentally-weighted indices and minimum-volatility indices. In this whitepaper we first take a critical look at the pros and cons of smart beta investing in general. After this we successively discuss the most popular types of smart indices that have been introduced in recent years.
Commodities have become less popular for investors. They are wondering if the traditional arguments for investing in commodities – like diversification- still apply. This paper explores a better way to invest: by setting up a commodity factor portfolio