chinazh
Achieving your investment goals with factors: improve diversification

Achieving your investment goals with factors: improve diversification

28-06-2018 | 市场观点

Factor-based strategies can help investors build better diversified portfolios. Third article of a series on how factors can help investors achieve specific goals.

Speed read

  • Diversification across asset classes called into question 
  • Looking through the factor lens for a fresh perspective 
  • Even with a factor approach, avoiding concentration risk remains key

The context

Diversification is often said to be the only ‘free lunch’ for investors. And for centuries, asset owners have applied this principle by dividing their holdings across different asset classes. But the dramatic increase in correlations between asset classes during the market wobbles of the 2000s, especially during the global financial crisis, has started to cast doubt on the benefits of traditional diversification.

One of the key debates today in the financial industry is whether quantitative approaches to portfolio selection and construction are more effective than traditional ones, in particular in terms of diversification. For instance, the influential 2009 study1 on the Norwegian Oil Fund and factor investing showed that despite a seemingly diversified profile, the fund’s active returns had large exposure to systematic risks, mainly due to bottom-up decisions.

The quest for more robust diversification techniques has caused many investors to turn to factor investing. In fact, a recent FTSE Russell survey of asset owners found that improved diversification ranked third among the top investment goals that lead them to consider factor-based strategies

关注官方微信
QR code Wechat

Scientific grounding

Contrary to traditional asset allocation, which often lacks scientific grounding, factor allocation is based on decades of robust empirical analysis. This research documents a number of significant, persistent and relatively uncorrelated risk-return patterns across financial markets. Investors can take advantage of these patterns and select securities with different risk-return characteristics to achieve better diversification.

A 2012 paper2 by Antti Ilmanen and Jared Kizer analyzing market data on a number of asset classes dating back to 1927 reported that diversification into and across factors has been much more effective in reducing portfolio volatility and market directionality than traditional asset class approaches. And while the authors acknowledged that long-short investing generates the most diversification benefits, which implies short-selling and leverage, they also found meaningful benefits in a long-only context.

More recently, in a research report3 initially prepared for Robeco, Kees Koedijk and Alfred Slager, from Tilburg University, and Philip Stork, from VU University Amsterdam, also looked at the degree to which diversification can be achieved using a factor-based approach instead of an asset-based one. They argued that diversification across factors has major benefits, as the correlation between factors such as value or momentum is much lower than between investment categories.

The diversification benefits of factor investing are also evidenced by the performance of Robeco’s Multi-Factor Equities strategy over time. Figure 1 shows the simulated performance of a multi-factor portfolio over the period 1988 through 2015. It also shows which of the four factors (value, momentum, low volatility and quality) targeted in our quantitative equity strategies outperformed in each year.

Figure 1: balanced and stable outperformance

Source: Robeco, MSCI. Excess returns are measured relative to the MSCI World index from June 1988 through December 2015. Returns are measured in USD. The Robeco factor strategies are based on portfolio simulation and net of transaction costs of 75 bp. The factor weights in the multi-factor proposition are 25% Value, 25% Momentum, 25% Low-Volatility and 25% Quality. The bars show whether an individual factor strategy yielded a positive excess return in each year. The value of your investments may fluctuate. Past performance is no guarantee of future results.

Ultimately, the result is a balanced and stable outperformance, compared to the broader market (grey area), with positive contributions from at least three factors in three out of four full calendar years.

Other considerations

Although the focus should remain on optimizing factor exposures to ensure diversification, the merits of investing in a broad and varied selection of securities should not be forgotten. Robeco’s in-house research shows that adding sector weight constraints to an unconstrained portfolio reduces concentration risk while not significantly altering returns, at least to a degree. At a certain point, however, concentration limits start to have a negative effect on performance.

This implies that an optimal level of concentration exists, and this should be taken into account by investors. Efficient factor strategies should therefore not only focus on finding the best factor exposure, but also prevent unintended geographic or sector biases, as well as undue concentration on some single securities or sub-segments of the financial markets. One way to ensure this is to establish strict but workable concentration rules, as this would lead to a varied selection of stocks or bonds while avoiding excessive sector and country tilts.

1 A. Ang, W. Goetzmann and S. Schaefer, ‘Evaluation of Active Management of the Norwegian Government Pension Fund – Global’, prepared at the request of the Norwegian Ministry of Finance, 2009.
2 A. Ilmanen and J. Kizer, ‘The Death of Diversification Has Been Greatly Exaggerated’, The Journal of Portfolio Management, Spring 2012.
3 K. Koedijk, A. Slager and P. Stork, ‘Investing in Systematic Factor Premiums’, European Financial Management, 2016.

免责声明:

本文由荷宝海外投资基金管理(上海)有限公司(“荷宝上海”)编制, 本文内容仅供参考, 并不构成荷宝上海对任何人的购买或出售任何产品的建议、专业意见、要约、招揽或邀请。本文不应被视为对购买或出售任何投资产品的推荐或采用任何投资策略的建议。本文中的任何内容不得被视为有关法律、税务或投资方面的咨询, 也不表示任何投资或策略适合您的个人情况, 或以其他方式构成对您个人的推荐。 本文中所包含的信息和/或分析系根据荷宝上海所认为的可信渠道而获得的信息准备而成。荷宝上海不就其准确性、正确性、实用性或完整性作出任何陈述, 也不对因使用本文中的信息和/或分析而造成的损失承担任何责任。荷宝上海或其他任何关联机构及其董事、高级管理人员、员工均不对任何人因其依据本文所含信息而造成的任何直接或间接的损失或损害或任何其他后果承担责任或义务。 本文包含一些有关于未来业务、目标、管理纪律或其他方面的前瞻性陈述与预测, 这些陈述含有假设、风险和不确定性, 且是建立在截止到本文编写之日已有的信息之上。基于此, 我们不能保证这些前瞻性情况都会发生, 实际情况可能会与本文中的陈述具有一定的差别。我们不能保证本文中的统计信息在任何特定条件下都是准确、适当和完整的, 亦不能保证这些统计信息以及据以得出这些信息的假设能够反映荷宝上海可能遇到的市场条件或未来表现。本文中的信息是基于当前的市场情况, 这很有可能因随后的市场事件或其他原因而发生变化, 本文内容可能因此未反映最新情况,荷宝上海不负责更新本文, 或对本文中不准确或遗漏之信息进行纠正。
与本文相关的主题是:

Disclaimer

The information contained in the website is solely intended for professional investors. Some funds shown on this website fall outside the scope of the Dutch Act on the Financial Supervision (Wet op het financieel toezicht) and therefore do not (need to) have a license from the Authority for the Financial Markets (AFM).

The funds shown on this website may not be available in your country. Please select your country website (top right corner) to view the products that are available in your country.

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 product should only be made after reading the related legal documents such as management regulations, prospectuses, annual and semi-annual reports, which can be all be obtained free of charge at this website and at the Robeco offices in each country where Robeco has a presence.

Please confirm that you are a professional investor and/or institutional investor and that you have read, understood and accept the terms of use for this website.

I Disagree