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Risk due diligence approach

An approach* to implementing factor investing. An analysis is made to establish whether the current portfolio is suitably distributed over factors and does not incorporate excessive risk. This can be done using the 'Robeco Factor Exposure Monitor'.

The advantage of this approach is that investors obtain greater insight into their exposure to specific factors in the portfolio. It also helps determine whether the portfolio contains desired or undesired concentrations of factors. It then becomes easier to assess the sensitivity of the portfolio in specific scenarios.

The chart below shows a hypothetical portfolio of factor overweights and underweights. Per factor the portfolio has three subdivisions into levels of exposure: substantial (top), average (middle) and low (bottom).

Figure 8. Relative factor exposures of portfolios
Source: Robeco, Quantitative Research, 2014

* Other approaches involve using factor tilts and a system of portfolio optimization based exclusively on factors.



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