Head of Quant Equity Research
Active Quant: finding alpha with confidence
Blending data-driven insights, risk control and quant expertise to pursue reliable returns.
• Insight
A prudent route to effective factor timing
Equity factor investing has become significantly more popular in recent years. The underlying factor portfolios’ returns exhibit distinct cycles, tempting investors to try their hand at dynamically adjusting their factor allocation. However, the key question remains: how can investors best time factors to maximize returns while minimizing risk?
Authors
Portfolio Manager
Top keywords
Summary
- Diversification is key for effective factor investing
- Additional factor timing benefits depend on accuracy and implementation of timing signals
- Dynamic 1/N multi-factor approach improves on static approach when being cost-efficient
Factor timing is the holy grail in equity factor investing. With factors exhibiting underperformance at times, the temptation to dynamically adjust one’s factor allocation is high. Indeed, a clairvoyant factor investor could enjoy sizable outperformance relative to a static factor allocation. In our recent white paper, we explore to what extent this factor timing opportunity set can be tapped in practice. Specifically, we investigate the practical implications of factor timing by considering the role of factor momentum, valuation spreads and seasonality. Indeed, valuation spreads and seasonality signals have predictive power with regards to factor returns; yet these factor timing gains turn out to be more apparent than real as the timed strategy is lagging the benchmark after considering transaction costs. Conversely, factor momentum can add active return before costs, of which almost half can be salvaged after transaction costs.
Notwithstanding, factor momentum brings about high strategy turnover. As a consequence, one has to thoughtfully trade off the associated transaction costs (which are certain) versus the expected factor momentum alpha (which is noisy). Our findings show that a Dynamic 1/N multi-factor approach presents a prudent route to effective equity factor timing by combining low strategy turnover with the pervasive factor momentum effect while maintaining proper factor diversification.
Find out more
Read the full paper and methodology here
Get the latest insights
Subscribe to our newsletter for investment updates and expert analysis.
Important information
THIS WEBSITE IS SOLELY INTENDED FOR PROFESSIONAL INVESTORS, WHICH HAS THE MEANING ASCRIBED TO IT IN THE SECURITIES AND FUTURES ORDINANCE (CAP. 571 OF THE LAWS OF HONG KONG) AND ITS SUBSIDIARY LEGISLATION. Investment involves risks. Past performance is not indicative of future performance. The information contained in this website is provided for reference only and does not constitute investment advice or an offer or solicitation to buy or sell in any securities or to adopt any investment strategy. Investors should not base their investment decisions solely on the information provided on this website and are advised to seek independent advice (including advice on tax implications) before making any investment decisions. Investors should ensure they fully understand the risks associated with the investment products and should also consider their own investment objectives and risk tolerance level. The investment decision is yours. You should not invest unless the intermediary who sells you the investment products has advised you that it is suitable for you and has explained how it is consistent with your investment objectives. Please refer to the relevant offering documents or other legal documents for further details including the risk factors. This website is published by Robeco Hong Kong Limited which is regulated by the Hong Kong Securities and Futures Commission (“SFC”) (CE No. APU851). This website has not been reviewed by the SFC. No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of investments may fluctuate. Past performance, projections, or forecasts included in this website should not be regarded as guarantees or indications of future performance, and no express or implied warranty is provided. The contents of this website are based on sources believed to be reliable, but due to the nature of information delivery technology and the necessity of using multiple data sources, including third party content, their accuracy is not guaranteed. The opinions expressed are as of the date shown above and may change as market conditions evolve, and are subject to change without notice. These opinions may differ from those of other Robeco investment professionals. Robeco accepts no liability for any direct, indirect, or consequential loss arising from the use of this material or any comments, opinions, or estimates contained herein. Robeco has no duty to update this website or any website content. Materials on this website may not be reproduced, distributed, or published without prior written permission from Robeco. Unless otherwise specified, Source: Robeco.
