You would not be pleased if you thought you had the right exposures to factors that drive expected returns, but it turns out you actually have precisely the opposite tilts. This is happening quite often though. Quantitative researcher Joop Huij and head of equity research David Blitz argue that institutional investors should be careful when assessing asset managers.
There is over twenty years of academic literature on how investors can get extra returns with exposure to factor premiums such as value, low volatility and momentum. These parts of the market offer the best prospects in terms of risk and reward and investors are well advised to adjust their portfolios to these premiums.
So are investors using these insights to their advantage? Huij and Blitz helped to develop the Robeco Factor Exposure Monitor to measure exposure in portfolios versus the benchmark. They scanned several portfolios of institutional investors and found a surprising outcome. “Often these portfolios turn out to be concentrated in the wrong type of stocks: high-risk, growth stocks which have poor prospects for returns,” says Huij. But why are investors doing this?
Blitz studied the academic literature and found that the reason may be a conflict of interest between investors and asset managers.
“Often asset managers take high-risk stocks that do well in bull markets. This is the period when money is flowing to the market”, he says. The winner takes all, so a profit-maximizing asset manager has the incentive to take high risks in order to be a top performer, says Blitz.
“This strategy would allow him to attract more assets under management. But it is not in the interests of investors.”
”The problem is that asset owners often do not know that asset managers are taking large risks with their money. In some cases asset managers even change their fund name to a hot style, while their investment policy remains unchanged,” he adds.
‘Let the numbers tell the tale’
Huij argues that the way to prevent this conflict of interest is through more transparency. “Even though investors know that exposure to factor premiums enhances risk and reward, they are often not aware of their actual exposure. They should gather more information to base their decisions on, and the Robeco Factor Exposure Monitor can provide it. Let the numbers tell the tale.”
This article is written as part of a series of articles for the Robeco World Investment Forum on how long-term trends influence investments.
The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.
The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.
Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is ACOLIN Fund Services AG, Affolternstrasse 56, 8050 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.
Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/RobecoSAM AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/RobecoSAM AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.
This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.