Investors typically include equities in their asset allocation to earn the expected equity premium. But we argue that investors should explicitly consider all the premiums offered by the equity market, when making their strategic investment decisions.
Investors tend to focus on harvesting the risk premiums offered by traditional asset classes when making their strategic investment decisions. Some recent papers, however, argue that investors should also consider various other premiums for possible inclusion in the strategic asset allocation. Examples of such premiums that have been documented for the equity market are the size, value, momentum and low volatility effects.
In this article1, the author demonstrates that the theoretically optimal strategic allocation to these premiums is sizable, even when using highly conservative assumptions regarding their future expected magnitudes. The pros and cons of two ways of obtaining the implied exposures in practice, specifically passively managed index funds versus actively managed quant funds, are also discussed.
1Blitz, D.C., 2012, ‘Strategic allocation to premiums in the equity market’, The Journal of Index Investing.
This report is not available for users from countries where the offering of foreign financial services is not permitted, such as US Persons.
Your details are not shared with third parties. This information is exclusively intended for professional investors. All requests are checked.
Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, annual and semi-annual reports, which can be all be obtained free of charge at this website and at the Robeco offices in each country where Robeco has a presence.