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Factor investing – the investment strategy that aims to capture ‘hidden’ returns in financial markets – is rapidly gaining in popularity. However, it is important to follow the right factors, and to be wary of one factor counteracting another, to get the best results. Otherwise, investors might follow generic factor strategies that expose them to risks that are not properly rewarded, resulting in inferior performance.
Since 2005, the Robeco Quantitative Research team has concentrated on analyzing, evaluating, and designing factor strategies that deliver more stable and consistent returns in the long run. We have long believed in the benefits of the evidence-based approach that true factor investing requires. Based on this philosophy, we have been able to give our clients access to portfolios with systematic exposure to a range of factor premiums for well over a decade. It has created a mini-industry within asset management that has won many converts.
Now it is time to take stock of how factor investing is being used, and sometimes, misused. Although some investors are already actively using factor investing strategies, others are still pondering whether they should use multiple factors across all their portfolios. Their more wary approach is justified as factor investing is not a one-size-fits-all investment phenomenon.
A strategic allocation to factor premiums is not only dependent on our evidence-based investment philosophy, but also on a careful assessment of a client’s specific needs. In some cases, fund solutions or tailored mandates may not always be the best structures to meet these needs.
In this publication, we address these challenges by looking at the lessons learned from our experiences with clients who have incorporated factor investing into their portfolio allocation strategies. We present three case studies of professional investors who are successfully implementing bespoke multi-factor solutions – a Dutch pension fund, a large sovereign wealth fund and a retail bank. These clients’ bespoke multi-factor solutions offer valuable insights for all.