How factor investing fits into active vs passive

How factor investing fits into active vs passive

19-09-2014 | ビデオ

Why factor investing makes sense. Altaf Kassam, MSCI Head of Index Applied Research EMEAI. “Factors are shown to outperform historically and their outperformance can be explained. It is suitable for passive and active investors.”

Interview

Factor investing is the talk of the town. But how does it fit into the debate of active versus passive? We interviewed two experts with different perspectives: one working for an index provider while the other represents an active management house.

最新の「インサイト」を読む
最新の「インサイト」を読む
配信登録

Altaf Kassam

Altaf Kassam is MSCI Head of Index Applied Research EMEAI, while Joop Huij is a Senior Quantitative Researcher at Robeco. Both spoke at the Robeco Factor Investing Seminar held in in Rotterdam. We interviewed them after the event.

Since the financial crisis, investors have become more critical about the role of active management and trackers have gained in popularity. The debate about its role is not just held by pension funds, but also by fund distributors and financial regulators. Can factor investing bridge the divide between active and passive investing?

How would you define factor investing?

Altaf Kassam:
It is investing in equity indexes whose components’ risk and return is defined by similar characteristics, or weighting indexes differently from market capitalization to capture specific characteristics. ‘risk and return defined by similar characteristics’

Joop Huij:
Our definition is similar but I would like add the words ‘systematic approach’ and ‘investing strategically’.

What factors do you identify?

Joop Huij:
To us it is important that there is strong evidence for the existence of a premium. We identify value, momentum and low-volatility as the three key factors, because these three convinced us most.

Altaf Kassam:
We currently identify value, momentum, low-volatility, quality, yield and low-size as factors offering long-term risk-adjusted outperformance. We are always evaluating new factors.

How does factor investing fit into the debate of active versus passive?

Altaf Kassam:
It is a third way of investing: between active and passive. It does not replace market-cap passive investing, nor does it fully replace active management. Factor investing has some of the features of passive investing, such as investing systematically at low cost. It also has some of the features of active management by aiming to generate returns above the market cap-weighted index. ‘third way of investing: between active and passive’

Joop Huij:
I agree that it will be the third pillar in the portfolio. There are, however, very different approaches to factor investing. For instance, factor investing can be implemented by tracking factor indices, which means the use of a transparent rules-based approach, and it can be implemented using proprietary models and processes. This is the way that our factor funds are constructed.

What is the role of factor indices in the discussion on factor investing?

Altaf Kassam:
We see them used for passive investments, where people track our factor indexes closely and put money in them. But they can also be used for active management to measure performance, in some cases providing a more suitable benchmark than market capitalization indexes. They can also be used to assess the performance and risk of active managers and to try and understand how much of this might be attributed to factor exposure, and how much might be skill.

To assess performance and risk of active managers

Joop Huij:
Besides what Altaf mentioned, it can be used to better inform investors. For instance, the Robeco Momentum strategy can be evaluated both to a market-cap weighted index and against a momentum index. Suppose for example that in a particular year the Robeco Momentum portfolio underperformed the market index by 2% and that the momentum index underperformed the market index by 5%. In that case you could say we destroyed value to our clients given that we had a 2% lower return than the market. However, you could also say that, given the difficulties to momentum factor had in that year, we actually added 3% by following the Robeco approach.

What should investors take into account when implementing factor investing?

Joop Huij:
There is not a one-size fits all factor solution but the optimal solution is investor-specific. A pension fund typically has very different goals and objectives than a large sovereign wealth fund or a family office. When implementing factor investing, one should therefore take ones goals but also ones preferences into account. Next to that, the current portfolio and how the portfolio is positioned with respect to certain factors is something to take into account in implementing a factor investing portfolio.

Altaf Kassam:
There is not one factor that performs better than the market-cap weighted index over all time periods. There is cyclicality in all factors. Often, factors can underperform the market for several months, if not years. And also factor indexes will have higher turnover than market-cap indexes, which means higher costs of implementation. Finally, liquidity is more of a concern with factors than with the market-cap weighted index. Factor indexes generally have lower capacity than market-cap weighted indexes.

Joop Huij

What is the best way to combine factors within a portfolio?

Joop Huij:
It is most important to be well diversified across different factors. We believe that this is crucial to make factor investing a success. While the factors earn a premium over a longer period of time, there are periods in which an individual factor, or even several factors, lag the market. A well-diversified factor portfolio can absorb these periods of factor underperformance. Our research shows that an equal weighted allocation to value, momentum and low-volatility provides good diversification. One can deviate from this if more emphasis should be given to decrease the risk of the portfolio, in which case more should be allocated to the low-volatility factor. Or, if higher expected returns are to be achieved, more weight should be given to value and momentum.

Altaf Kassam:
We have looked at simple, equally weighted combinations. But we also checked whether combining factors based on risk, valuation or momentum makes sense. Our current research indicates that just combining factors with equal weights is a strategy which is quite hard to beat. So maybe some of these more sophisticated measures do not add much value.

What is your opinion on timing factors?

Altaf Kassam:
One answer could be that factors should be held strategically for the long term. You do not need to time factors to produce excess returns over a market-cap weighted index as long as you have a long enough investment horizon. We recently published a paper that looks at 40 years of data on factor index history. The research shows that historically, if you hold factor indexes 3 to 5 years, the chance of outperforming the market-cap weighted index is above 75% for most factor indexes. And with a longer time period, the chance of outperformance grows to almost 100%. Many of our clients come to us and ask us about timing factors and we started developing strategies based on the economic cycle. It really depends on your tolerance for risk, your time horizon and whether you have any views on the macro-economic environment as well.

Joop Huij:
Timing factors is extremely difficult and we therefore believe one should be very humble in trying to time the factors. All the potential added value of factor investing can easily evaporate by incorrectly timing factors and the extra turnover as a result of timing factors. In our research we do see some potential for timing factors and we try to benefit from this in how we rebalance across factors in our factor investing solutions. However, only a relatively small part of our risk-budget is allocated to the timing of factors and we use our timing in such a way that turnover is actually reduced as opposed to increased.

Timing factors is extremely difficult

What is the future of factor investing? Will it be adopted widely?

Altaf Kassam:
We still think there is a place for passive and active investing. On the passive side, if you don’t have a view on factors in terms of risk and return, you should remain in market-cap passive. Even our biggest clients who invested billions in factor indexes haven’t moved all of their equity allocation into factor investing. I don’t see that happening. At the same time, active managers should still be able to add value through skill, market timing and concentrated stock portfolios. These are things we don’t do when we build our indexes. I do believe factor investing will be widely adopted. Growth rates are substantial, but it won’t fully replace all the other forms of equity investing.

Joop Huij:
Professional investors are increasingly looking at factor investing and what factor investing can do for them. Moreover, we see an increasing number of investors actually implementing factor investing in one way or another. Given the vast amount of evidence in favor of it and the fact that it is getting more and more embraced by the industry, we strongly believe factor investing is not a hype and here to stay.

Factor investing is not a hype

重要事項

当資料は情報提供を目的として、Robeco Institutional Asset Management B.V.が作成した英文資料、もしくはその英文資料をロベコ・ジャパン株式会社が翻訳したものです。資料中の個別の金融商品の売買の勧誘や推奨等を目的とするものではありません。記載された情報は十分信頼できるものであると考えておりますが、その正確性、完全性を保証するものではありません。意見や見通しはあくまで作成日における弊社の判断に基づくものであり、今後予告なしに変更されることがあります。運用状況、市場動向、意見等は、過去の一時点あるいは過去の一定期間についてのものであり、過去の実績は将来の運用成果を保証または示唆するものではありません。また、記載された投資方針・戦略等は全ての投資家の皆様に適合するとは限りません。当資料は法律、税務、会計面での助言の提供を意図するものではありません。

ご契約に際しては、必要に応じ専門家にご相談の上、最終的なご判断はお客様ご自身でなさるようお願い致します。

運用を行う資産の評価額は、組入有価証券等の価格、金融市場の相場や金利等の変動、及び組入有価証券の発行体の財務状況による信用力等の影響を受けて変動します。また、外貨建資産に投資する場合は為替変動の影響も受けます。運用によって生じた損益は、全て投資家の皆様に帰属します。したがって投資元本や一定の運用成果が保証されているものではなく、投資元本を上回る損失を被ることがあります。弊社が行う金融商品取引業に係る手数料または報酬は、締結される契約の種類や契約資産額により異なるため、当資料において記載せず別途ご提示させて頂く場合があります。具体的な手数料または報酬の金額・計算方法につきましては弊社担当者へお問合せください。

当資料及び記載されている情報、商品に関する権利は弊社に帰属します。したがって、弊社の書面による同意なくしてその全部もしくは一部を複製またはその他の方法で配布することはご遠慮ください。

商号等: ロベコ・ジャパン株式会社  金融商品取引業者 関東財務局長(金商)第2780号

加入協会: 一般社団法人 日本投資顧問業協会

本記事に関連するテーマ: