We usually focus on how to make a good investment strategy even better, but in recent research we looked at how to make it worse.
In previous research we found a 6% return difference between good and bad low-volatility strategies (Blitz, Hanauer and van Vliet, “Beauty and the beast of low-volatility investing”, Robeco research paper, February 2015). In recent research, we did a similar exercise for value and momentum strategies.
Our research and live track records show that it is possible to create factor strategies that are superior to generic approaches. At Robeco we eliminate unrewarded risks, prevent going against other established factors, maximize diversification benefits, and avoid unnecessary portfolio turnover. This made us wonder whether we could also construct inferior factor strategies. In other words, factor strategies that are not designed to outperform, but to underperform a generic approach. This started out as a kind of joke, but the results turned out to be quite interesting.
The comparison between good and bad factor strategies is relevant for various reasons. For one, the bigger the gap between good and bad strategies, the more important it is to be selective when the objective is to capture factor premiums. Also, our analysis helps to better understand what differentiates a successful factor investing approach from an unsuccessful one. Finally, distinguishing between good and bad factor strategies may shed new light on the performance of generic factor strategies. These basically contain both types of stocks, although not necessarily in the same, constant proportion.
‘Clearly, not all value stocks and not all momentum stocks are equally attractive’
In our research, we found that different types of value and momentum stocks exhibit very different performance characteristics. A value approach which incorporates some momentum and risk considerations tends to outperform a generic approach, but a value approach which intentionally goes against these factors significantly underperforms. Similarly, a momentum approach which incorporates some value and risk considerations tends to outperform a generic approach, while a momentum approach which intentionally goes against these factors significantly underperforms. Over the past decades, the two approaches show a difference in risk-adjusted return amounting to an astounding 5-7% per annum.
Based on these results it is clear that investors should not buy stocks merely based on one particular factor, but also take into account other factors that are known to have a large impact on returns. Generic factor strategies tend to contain a time-varying mix of stocks that are attractive and stocks that are unattractive on other factors. On balance, the exposures of a generic factor strategy to other factors are not necessarily neutral, but can also be unattractive. The Robeco approach towards factor investing effectively prevents going against other established factors.
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 Robeco Switzerland AG, Josefstrasse 218, 8005 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/Robeco Switzerland 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/Robeco Switzerland 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.