Academics have researched factor premiums for many decades, using datasets that sometimes span very long time periods2. Can you explain what triggered this new research effort?
“One of the concerns frequently raised by skeptics of factor investing is that while factors may have been extensively documented by academics in the more recent period, we can’t really be sure they will persist in the future. The main reason is p-hacking, which implies that several academic findings are the result of pure chance. If this is indeed the case, then targeting explicit exposure to factors may not necessarily lead to higher risk-adjusted returns in the long-run.”
“So, for our clients, it is very important to know which factors truly exist and offer attractive expected returns. One powerful way to determine whether factors are just a statistical blip or a result of the data mining of relatively recent data sets is to study their existence over a very long period. This is in essence what we did, going back to 1800 on the major global markets and studying factor portfolios.”
OK, but data mining concerns relate not only to the relatively short length of the time series that are typically analyzed by researchers in finance. Determining which price patterns you want to look at is not as straightforward as it sounds, either. There is still debate about which factors are really relevant for expected returns. How did you address this issue?
“To avoid objections on this front, our approach was to limit the degrees of freedom you have as researcher and consider the six most extensively documented factors in key peer-reviewed scientific journals. We replicated these anomalies and studied data spanning two centuries to find evidence of their existence in equity indices, government bonds, currencies and commodities.”
How did you compile such an impressive data set?
“We actually used a combination of different data sets. Historical data on financial markets dating back several centuries is very difficult to come by. Compiling this kind of information requires intensive manual work – scanning, checking, transcribing and cross-referencing with data from archival sources.”
“For this study, Robeco sponsored Erasmus University Rotterdam to obtain historical data from various sources to conduct academic research, and made it available to the Erasmus University community. We then combined this data with information from more conventional providers such as Bloomberg and Reuters.”
We found convincing evidence of most factor premiums across almost every decade in the period we analyzed for all asset classes
What would you say has been your most prominent finding?
“Without any hesitation, I would say the very high level of persistence of factor premiums. Based on earlier research on recent data sets, we were expecting these premiums to be persistent over time. But our results clearly exceeded our initial expectation. In particular, we found significant, persistent and robust momentum, value, seasonal and carry premiums within the four asset classes considered.”
“The evidence supporting the existence of the factor premiums we considered in this study is not limited to any sub-period. We found convincing evidence of most factor premiums across almost every decade in the period we analyzed for all asset classes. We also identified the existence of significant factor premiums regardless of the market and economic contexts, in bull and bear markets inflationary vs. non-inflationary periods, as well as during periods of economic boom and recessions.”
“Our results also show that a diversified multi-factor multi-asset portfolio can deliver very stable returns over very long periods of time. This is important as it reinforces our belief that factor premiums are a permanent feature of financial markets rather than just another passing market phenomenon.”
Did your results provide any insights into the underlying causes of factor premiums?
“Well, one of the main conclusions of our work is that the factor premiums we considered are definitely not compensation for risk. This reinforces the behavioral hypothesis explanation for these anomalies. It is also consistent with previous research by Robeco and academics which finds that factor premiums are not necessarily compensation for taking higher risk.”3
From this perspective, multi-asset factor investing seems like a fairly straightforward style that could be implemented relatively easily, through smart beta equity and fixed income products, for example. Is it really that simple?
“Not quite. For one, harvesting factor premiums within and across multiple asset classes requires a much more sophisticated approach than the one generic factor solutions typically apply. To achieve consistently strong returns, you need to remain well diversified across asset classes, markets and factors – at all times. And to ensure good diversification, you really need a holistic approach. A combination of several generic factor solutions will not provide that.”
1Baltussen, G., Swinkels, L. and Van Vliet, P., 2019. “Global Factor Premiums”, working paper available on SSRN
2 See for example: Dimson, E., Marsh, P. and Staunton, M., 2017. “Factor based investing: The long term evidence”, The Journal of Portfolio Management, Vol. 43, No. 5, pp. 15-37.
3 See for example: De Groot, W. and Huij, J., 2018. "Are the Fama-French factors really compensation for distress risk?", Journal of International Money and Finance, Elsevier, vol. 86(C), pp. 50-69.
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
Please read this information carefully.
This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:
3. Local legal and sales restrictions
The information contained in the Website is being provided for information purposes.
Neither information nor any opinion expressed on the 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. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.
4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.
5. Investment performance
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 your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.
6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.
7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.
8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.
10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong.