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The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).

This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.

This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.

I Disagree

11-19-2024 · Insight

More than meets the factor eye: Hidden depths in next-gen quant investing

At Robeco, we go beyond generic factors by continuously innovating factor themes and developing unique signals using short-term and alternative data. Recent research shows that generic factor scans can make corresponding investments appear unbalanced, while factor scans based on relevant factor definitions reveal these same portfolios to be actually well-balanced and profitable when it comes to exposure, risk, and performance.

Read the full paper here


Summary

  1. Our Quant Equity strategies balance enhanced factor and proprietary signal exposure

  2. Generic factor scans may fail to capture true nature of portfolios

  3. Our 20-year track record is largely unexplainable through generic factors

Measuring factor exposure can be ambiguous if generic factor definitions are used instead of enhanced versions which are designed to earn superior risk-adjusted returns. In our recent white paper, we show that factor investments may appear unbalanced when viewed through a generic factor lens. However, these same investments can represent a well-balanced and profitable combination in terms of exposure, risk, and performance when considered through a relevant factor lens.


The art of factor investing

Factors have become a staple in the portfolio constructor’s toolkit, where the goal is typically to maintain a consistent balance between factors to manage risk while harvesting the associated alpha. The majority of these successful factors can be grouped under value, momentum, quality, and low risk. At Robeco, we have continuously enhanced these core factor themes, as ongoing innovation helps sustain an alpha edge over generic factors; see Swade et al. (2024)1.

This edge is further amplified by going beyond traditional factor themes and bringing in proprietary signals that exploit short-term dynamics and/or alternative data sources2. To illustrate the efficacy of this combination, Blitz (2024) highlights that around 80% of the outperformance of the Robeco model cannot be explained by generic academic factors3.

Measuring factor exposure

Robeco Quant Equities’ unique factor differentiation has consistently placed it among the top performers in peer group performance comparisons (Blitz, 2024). However, prospects and clients are sometimes puzzled when they try to investigate our factor exposure using market factor analysis tools. For instance, they may diagnose what appears to be a factor imbalance, raising questions about the overall portfolio diversification. In our new paper, we shed light onto this very puzzle.

Specifically, we dive deeper into questions such as: How does one best measure factor exposure? Does it really matter how these factors are defined, or are they all the same? And most importantly, are these the ‘right’ factors for producing alpha?

To explore these questions, we use the Robeco Developed Markets Enhanced Indexing (DM EI) strategy, a global equity factor portfolio, and explore the current state of factor definitions. Figure 1 compares the factor exposures calculated using the z-score methodology on Robeco’s proprietary factor definitions and those of three market-leading providers of factor analysis tools. The comparison reveals that while Robeco’s factors share some common DNA with generic factors, they offer distinctive insights that enhance portfolio outcomes.

Figure 1 – Factor exposures of the Robeco Enhanced Indexing strategy

Figure 1 –  Factor exposures of the Robeco Enhanced Indexing strategy

Source: Robeco Quantitative Investments. Robeco Enhanced Indexing Developed Markets strategy through factor scan methodology of provider A, B and C, and through Robeco’s proprietary factors, as of July 2024. The y-axis shows factor exposure, measured using the z-score methodology.

Importantly, generic factor scans typically do not feature analyst revision factors (let alone short-term or alternative alpha signals), thus missing a crucial part of the overall picture. In the white paper, we further discuss the value of third-party factor scans for evaluating portfolios but also highlight some of their pitfalls. Lastly, we emphasize the importance of diversified and balanced portfolio construction to mitigate unrewarded risk and enhance long-term performance.

More than meets the factor eye

The evolution of factors in both academia and industry is unlikely to slow, let alone stop, and there is no one-size-fits-all approach to measuring factors, exposure to factors, or evaluating the risk and performance contribution from them. While the market offers powerful tools to analyze portfolios based on factor lenses, these tools are primarily designed to explain well-known risks. For asset managers focused on generating alpha, ongoing innovation within factor themes is essential – this includes integrating alternative data and short-term signals to capture unique return-enhancing exposures that might be missed by standard, generic scans.

Effective portfolio construction stems from a comprehensive understanding of how exposures manifest as portfolio risks. And although factor scans remain an important tool in a well-researched investment process, variations observed in factor scans should only be a concern if they are not well understood. Two decades on, the success of our Enhanced Indexing portfolios in both developed and emerging markets supports this stance – showing there is surely more than meets the factor eye.

Read the full paper here

Footnotes

1 Swade, A., Hanauer, M. X., Lohre, H., & Blitz, D. (2024). Factor Zoo (.zip). The Journal of Portfolio Management, Quantitative Special Issue 2024, 50(3), 11-31.
2 Harvesting short-term alpha factors brings some challenges and Blitz et al. (2024) allude to how these can be tackled in practice.
3 Blitz, D., 2024, “The unique alpha of Robeco Quant Equity strategies”. Robeco client note

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Important information
The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).
This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor.


Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States. This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.