Multi-asset products may be popular, particularly among insurers. But low yields and an increasingly stringent regulatory environment are posing challenges. Factor-based solutions that efficiently integrate sustainability criteria are a natural solution to address the challenges insurers face.
The current low-yield environment, rising pressure from clients and regulators to increase transparency and cost efficiency, and soaring demand from clients and regulators for sustainability integration all represent significant challenges for insurers. Factor-based, multi-asset solutions effectively address these challenges.
Backed by decades of academic research, the solutions offer attractive and uncorrelated sources of return, as well as high levels of risk control and transparency, at relatively low cost. Our own research and experience running such strategies show that adding factor allocation across the major asset classes generates significantly higher risk-adjusted returns compared to purely passive strategies in all asset classes, while offering an attractive fee basis for insurers.
Instead of simply replicating the market index, as passive strategies do, or focusing on a small subset of the investment universe, as is common with fundamental active portfolios, factor strategies can screen the entire universe and over- or underweight hundreds to thousands of instruments simultaneously.
At the same time, they eliminate the human or emotional biases that can sometimes drive investment decisions. They also make it possible to integrate sustainability criteria through elements such as exclusions, ESG score integration and impact investing, as a means to improve the overall sustainability profile of the portfolio.
Factor-based, multi-asset solutions can be tailored to suit a specific insurer’s needs and priorities. An insurer will have specific objectives and constraints for (segments of) their investment portfolios and therefore require tailored solutions that align their investments to their goals.
Their quantitative nature makes it relatively easy to integrate additional objectives and constraints in the security selection and portfolio construction process
Factor-based approaches lend themselves particularly well to such situations. Their quantitative nature makes it relatively easy to integrate additional objectives and constraints in the security selection and portfolio construction process.
The starting point is to determine the investment objectives for the strategy, such as delivering consistent returns over time, maximizing return on capital or achieving specific sustainability targets.
The next step is often to customize the solution, while remaining consistent with the investment objectives. At Robeco, we highlight three main areas for customization: risk and capital considerations, investment building blocks, and sustainability integration. The ideal investment solution is derived from combining the investment objectives with additional adjustments in these three areas.
Robeco has been very active in the field of sustainability and factor-based investing for over 20 years, having designed over 150 factor-based client solutions. Our approach translates our factor-based and sustainability integration building blocks into rigorous risk-controlled solutions that efficiently integrate sustainability considerations.
All these elements result in customized and sustainable factor-based, multi-asset solutions that effectively deal with the challenges faced by insurers today.
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