Factor exposures of mutual funds

Many studies document that factors such as value, momentum, quality and low-volatility lead to better investment results, but if that is the case, why haven’t large institutional investors arbitraged these factors away? Or can it be rational for mutual fund portfolio managers to actually go against proven factors? In this internship we want to examine the relationship between factor exposures and mutual fund performance and flows.

Some concrete ideas in this regard:

  • Do balanced funds, i.e. funds which invest in bonds and equities, have a bias to high-risk stocks, because of leverage constraints and mental accounting? E.g. if a balanced fund can invest 50% in equities, they may have an incentive to invest in risky equities in order to get more ‘bang for the buck’, which could help explain the existence of the low-volatility anomaly. 
  • Examine how many funds have significant biases towards factors with the right sign and with the wrong sign, and look at flows in and out these funds. Can it be that a lot of active funds have a significant bias towards expensive and risky stocks, but that these funds are just as successful at attracting flows as funds with the ‘right’ factor exposures?
  • In an earlier study we found that Exchange Traded Funds Factor exhibit a large dispersion in factor exposures, but that when aggregated these cancel out and only plain market exposure remains. However, that study only looked at US equity ETFs at one point in time, so an open question is if this conclusion can be generalized and if these exposures can vary over time.

Literature: Blitz, “Are Exchange-Traded Funds Harvesting Factor Premiums?”, SSRN working paper no. 2912287 (forthcoming Journal of Investment Consulting), 2017.

Are you interested?

Let us know your motivation and send it together with your CV and list of grades to SQ@robeco.nl.