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.
Please read this important information before proceeding further. It contains legal and regulatory notices relevant to the information contained on this website.
The information contained in the Website is NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws. The value of the investments may fluctuate. Past performance is no guarantee of future results. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency.
In the UK, Robeco Institutional Asset Management B.V. (“ROBECO”) only markets its funds to institutional clients and professional investors. Private investors seeking information about ROBECO should visit our corporate website www.robeco.com or contact their financial adviser. ROBECO will not be liable for any damages or losses suffered by private investors accessing these areas.
In the UK, ROBECO Funds has marketing approval for the funds listed on this website, all of which are UCITS funds. ROBECO is authorized by the AFM and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.
Many of the protections provided by the United Kingdom regulatory framework may not apply to investments in ROBECO Funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. No representation, warranty or undertaking is given as to the accuracy or completeness of the information on this website.
If you are not an institutional client or professional investor you should therefore not proceed. By proceeding please note that we will be treating you as a professional client for regulatory purposes and you agree to be bound by our terms and conditions.