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Bringing multi-factor investing into the multi-asset arena

Bringing multi-factor investing into the multi-asset arena

07-08-2018 | インサイト

Factor premiums exist in all major asset classes and can be harvested efficiently across the board. Our new Robeco multi-factor multi-asset strategies aim to reap maximum benefit from this finding.

  • Guido  Baltussen
    Guido
    Baltussen
    Lead Portfolio Manager

Speed read

  • Factor investing works well across markets and asset classes
  • Considering multiple asset classes has diversification benefits
  • Robeco is launching two multi-factor multi-asset strategies

Academics have been researching factors across asset classes for many years. In practice, however, the implementation of factor-based strategies has so far focused mainly on equities. This is slowly changing and factor investing is catching up in other asset classes, like corporate bonds. Recent Robeco research reveals overwhelming evidence that factor premiums can be harvested across all major asset classes, delivering attractive returns for over 200 years, with clear diversification benefits.1

Robeco has long been a pioneer in quantitative investing in stocks and credits, as well as in derivative markets, with assets under management of EUR 55.4 billion as of March 2018. We have been successfully managing quantitative strategies since the 1990s and applying multi-factor models to equities since 2002 and to corporate bonds since 2012. As the next step, we have decided to broaden our quantitative offering with the launch of two factor-based strategies: Multi Factor Multi Asset and Multi Factor Absolute Return.

“Over the past couple of years, we’ve seen increasing demand from clients for multi-asset multi-factor products,” says Guido Baltussen, lead portfolio manager of our Multi Asset Factor strategies. “With this new offering, we bundle our quantitative know-how in an all-in-one solution, that enables investors to harvest various proven factors across asset classes, including not only single stocks, but also corporate bonds and index-level markets like equity futures, bond futures, currencies and CDX contracts. In addition, we apply strong sustainability integration.”

With this new offering, we bundle our quantitative know-how in an all-in-one solution

More specifically, the two evidence-based strategies offer diversified exposure to six uncorrelated factor premiums – value, momentum, low risk, quality, carry and flow – across a wide range of global markets and asset classes, as summarized in the ‘Robeco Factor Matrix’ presented in Figure 1. The resulting portfolios consist of a balanced combination of different factor strategies across the cells of the matrix.

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Figure 1 | The Robeco Factor Matrix

Source: Robeco

Common building blocks, different objectives

The two strategies build upon the same factor-based engine, but differ in terms of their objectives. On the one hand, multi-factor multi-asset aims to harvest the broad equity and bond market premium and, in addition, benefit from a balanced exposure to the six factors. The strategy has an expected annual return of 3% above the return of a 60/40 equity-bond portfolio. As such, this product provides an ‘all-inclusive’ solution for clients looking for reasonably aggressive multi-asset portfolios.

On the other hand, Multi Factor Absolute Return seeks to harvest factor premiums while keeping returns uncorrelated with equity and bond market performance. The strategy has an expected absolute return of 6%, with a target volatility of 8%, and shows limited to zero correlation with hedge funds. In addition, both strategies integrate sustainability in four dimensions: positive screening, exclusions, active ownership and environmental footprint reduction.

“What sets these new solutions apart is that, for the first time, we are systematically harvesting an extensive set of factor premiums across major asset classes in one strategy,” says Baltussen. “Robeco is one of only very few asset managers in the world that has the necessary intellectual property to do this efficiently and, on top of that, apply ambitious sustainability standards during the investment process.”

Enhanced factor definitions

Compared to naïve and suboptimal factor strategies, Robeco’s approach to harvesting the factor premiums aims to deliver better risk-adjusted returns by enhancing the factor’s definitions. Enhanced factor definitions ensure we capture factors more efficiently by means of an advanced measurement of factor premiums aimed at mitigating unrewarded risk, and taking a multi-dimensional view, wherever possible combining multiple sources of information. Our research shows that using these enhanced definitions have the potential to further improve our strategy’s Sharpe ratio.

We also apply a portfolio construction algorithm that combines individual factor strategies into one portfolio while mitigating unintended risks and accounting for various liquidity considerations. This algorithm is designed to obtain a balanced exposure to factors across asset classes, while applying several risk constraints to ensure a well-diversified portfolio and avoid unintended risks. In our implementation, we avoid excessive turnover to ensure low trading costs.

Smart sustainability integration

Another important feature of our multi-factor multi-asset offering is that we provide advanced sustainability integration. Our approach to sustainable investing recognizes the importance of environmental, social and governance (ESG) considerations for all asset classes. It is based on three key elements: leading sustainability research, ESG Integration and active ownership. We incorporate these insights into our investment strategies in a tailored way to generate better risk-adjusted returns. Moreover, with our active ownership approach we work with our companies to improve their ESG performance and enrich our ongoing research.

“Financial institutions are increasingly required to take sustainability criteria into account in their investment process, in addition to classic return objectives,” says Baltussen. “Our approach to sustainability integration is designed to achieve just that: delivering portfolios with superior sustainability profiles while ensuring optimal exposure to the selected return factors.”

Updated on 7 August 2018. This article was initially published in June 2018.

1 See our recently published book of collected research articles: G. Baltussen, M. Martens, P. van Vliet, ‘Quant Allocation - Collected Robeco Articles’, 2018.

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