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A study* by MSCI for the Norwegian Ministry of Finance examines how factor investing can be applied to very large portfolios, such as the EUR 700 bln Norwegian reserve fund. Consistent with previous studies by Robeco they recommend allocating to, amongst others, the value, momentum and low-volatility factors.
Although the indices proposed by MSCI to harvest these factors have excellent investability characteristics, they represent low-conviction approaches which only tilt the portfolio slightly towards a given factor. This helps to explain the relatively modest Sharpe ratio improvements reported in the study.
We find that enhanced factor solutions offer much more attractive performance characteristics. Examples of such enhancements are avoiding risks that are not properly rewarded, and preventing going against other proven factors, when focusing on one particular factor.**