Robeco logo

Disclaimer Robeco Switzerland Ltd.

The information contained on these pages is solely for marketing purposes.

Access to the funds is restricted to (i) Qualified Investors within the meaning of art. 10 para. 3 et sequ. of the Swiss Federal Act on Collective Investment Schemes (“CISA”), (ii) Institutional Investors within the meaning of art. 4 para. 3 and 4 of the Financial Services Act (“FinSA”) domiciled Switzerland and (iii) Professional Clients in accordance with Annex II of the Markets in Financial Instruments Directive II (“MiFID II”) domiciled in the European Union und European Economic Area with a license to distribute / promote financial instruments in such capacity or herewith requesting respective information on products and services in their capacity as Professional Clients.

The Funds are domiciled in Luxembourg and The Netherlands. ACOLIN Fund Services AG, postal address: Leutschenbachstrasse 50, CH-8050 Zürich, acts as the Swiss representative of the Fund(s). UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zurich, postal address: Europastrasse 2, P.O. Box, CH-8152 Opfikon, acts as the Swiss paying agent.

The prospectus, the Key Investor Information Documents (KIIDs), the articles of association, the annual and semi-annual reports of the Fund(s) may be obtained, on simple request and free of charge, at the office of the Swiss representative ACOLIN Fund Services AG. The prospectuses are also available via the website https://www.robeco.com/ch.

Some funds about which information is shown on these pages may fall outside the scope of CISA and therefore do not (need to) have a license from or registration with the Swiss Financial Market Supervisory Authority (FINMA).

Some funds about which information is shown on this website may not be available in your domicile country. Please check the registration status in your respective domicile country. To view the Robeco Switzerland Ltd. products that are registered/available in your country, please go to the respective Fund Selector, which can be found on this website and select your country of domicile.

Neither information nor any opinion expressed on this 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 Switzerland Ltd. product should only be made after reading the related legal documents such as prospectuses, annual and semi-annual reports.

By clicking “I agree” you confirm that you/the company you represent falls under one of the above-mentioned categories of addressees and that you have read, understood and accept the terms of use for this website.

I Disagree

01-09-2016 · Research

Factor investing versus sector investing

A recent study suggests that sector investing does as well or even better than factor investing in a long-only context. We challenge this conclusion and show that an explicit allocation to well established factors yields better results than allocation to sectors.

    Authors

  • Simon Lansdorp - PhD, Portfolio Manager Sustainable Index Solutions

    Simon Lansdorp

    PhD, Portfolio Manager Sustainable Index Solutions

Summary

  1. A recent study suggests sector investing beats factor investing in long-only strategies

  2. However, these findings crucially depend on the selection of factors

  3. When we consider well established factors, including Low-Risk, factor investing is superior

Factor investing uses a rules-based approach to isolate assets with certain characteristics that are expected to deliver superior risk-adjusted returns. Examples are stocks that are inexpensive relative to their fundamentals, stocks with strong recent performance, low-risk stocks, or high-quality stocks. Strategic allocation to such factors has been shown to provide diversification benefits and improve risk-adjusted returns over the more traditional portfolio management approaches that explicitly allocate to countries and/or sectors.

Interestingly, a recent working paper by Brierè and Szafarz (Factor-Based v. Industry-Based Allocation: The Contes, 2016) provides results of a contest between factor-based and sector-based investing. The authors conclude there is no clear winner between the two approaches in the long-only context. We challenge their conclusion and argue that results of the mentioned study are crucially dependent on the choice of factors that they consider. In fact, we show that an explicit allocation to the well-established factor premiums dominates allocation to sectors regardless of the optimization objective that is used.

Brierè and Szafarz (BS2016) consider the Size, Value, Momentum, and Quality factors and ten sectors, as classified by Kenneth French. While the authors show that factor investing is superior to sector investing within the long-short context, sector investing does as well, or even better than factor investing in the long-only context; i.e. when short-selling is not allowed. More specifically, the authors show that factor investing is the superior approach when evaluated using certain performance metrics, such as attaining the highest return, while sector investing beats factor investing when other performance metrics are used as the relevant evaluation criteria. For example, the paper claims that sector investing has the potential to offer greater downside protection than factor investing as strategies based on certain sector allocations are exposed to lower absolute risk levels than the best possible factor allocation.

Sector investing lacks a theoretical foundation

We oppose the idea that sector investing can add as much, or even more value than factor investing, even in the long-only context. First, there is no theoretical foundation for sector investing. While certain sectors have historically outperformed other sectors, there is no reason to expect this pattern will continue. Factor investing, on the other hand, is based on a vast amount of academic evidence that shows the existence of several factor premiums, provides reasons to expect these factors to continue to earn a premium in the future, and shows that factor-based strategies have added value in portfolios in practice.

Second, regardless of differences in the theoretical foundations, we argue that the empirical findings of BS2016 crucially depend on their selection of factors, and that conclusions turn in favor of factor investing if a different choice of factors is made. For instance, at Robeco, we believe in four key factor premiums that, next to Value, Momentum, and Quality, also includes the Low-Risk factor. The reason why BS2016 find that sectors have more potential to provide downside protection could well be because they do not include the Low-Risk factor in their selection. Consequently, the sector investing approach can be tilted to defensive sectors like utilities, but in their setting the factor investing approach is restrained from allocating to the defensive segment of the market.

Factor investing has superior results

We have ran our own horse-race between factor investing and sector investing, but this time also including a Low-Risk factor in the contest. We find that factor investing is superior to sector investing no matter what metric is used for performance evaluation. Moreover, the factor portfolios used in this analysis are based on very generic factor definitions. Using more sophisticated factor strategies is likely to give even better results, making the case in favor of factor investing even more compelling.

Download the publication

loader