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The main focus of the biopharmaceutical company is diseases involving liver and cancers, as these diseases are defined genetically. Dicerna makes use of an RNA interference technology, patented by Dicerna itself. The RNAi molecules are proprietary. Dicerna Pharmaceuticals Inc. This is a rare, inherited, autosomal, recessive disorder.

Factor investing robeco investment cross exchange rate and triangular arbitrage forex

Factor investing robeco investment

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Rising inflation has become a growing concern for consumers around the world. This after central bankers and analysts have been reassuring consumers and investors for nearly two years that they need not fear rising prices. We discuss the topic with Rikkert Scholten and Bob Stoutjesdijk. Amid volatile market conditions, listed real estate has outperformed general equity over the past year. Listen in as Frank Onstwedder and Folmer Pietersma tell us all about it.

Emerging markets look extremely cheap. But are they cheap for a reason? We bring some 70 years of investment experience to the table to discuss the risks and opportunities that emerging markets offer in these volatile times. Tune in to our latest podcast episode. Investors have grown to recognize the importance of having a say in how their capital is used. Tune in to hear them share their insights on the topic.

Apple Podcasts Preview. Over geld praat je niet. De Minder Werken Podcast. Jong Beleggen, de podcast. Mark Tuitert Drive Podcast. There is also no arbitrage opportunity for other market participants as the index holdings, as well as additions and deletions from the index, are only known to the client and their asset manager. Another important feature of our factor investing offering is our ability to report precisely and quickly on sustainability outcomes.

In addition to the exposure to the four factors mentioned above, the index exhibits a size tilt i. The result is an index with attractive factor characteristics and an advanced sustainability profile. This publication is intended for professional investors. Robeco Institutional Asset Management B. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. In May , the PRI is continuing its work on understanding how responsible investment is undertaken in passive investments.

Site powered by Webvision Cloud. Skip to main content Skip to navigation. Passive investments. Embracing ESG investing through a sustainable multi-factor equity index. Reference This publication is intended for professional investors. More Passive investments. Article The PRI is inviting signatories to join its consultation on the passive investment market and its influence on responsible investment TZ In May , the PRI is continuing its work on understanding how responsible investment is undertaken in passive investments.

Load more. All content is provided with the understanding that the authors and publishers are not providing advice on legal, economic, investment or other professional issues and services. PRI Association is not responsible for the content of websites and information resources that may be referenced.

The sovereign wealth funds and long-term investing vs short-term rather

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Another major flaw of products that track public smart beta indices is that they are prone to overcrowding and arbitrage. Generic factor indices often publicly share their holdings and rebalancing methodology. This transparency comes at a cost for those who track these indices, as other market participants can identify in advance which trades are going to be executed and opportunistically take advantage of these moves.

As a result, passive investors tend to buy securities at inflated prices and to sell them at depressed prices. Efficient factor strategies, by contrast, are designed in such a way that factor premiums do not clash with each other. One way of achieving this is to apply enhanced factor definitions that ensure the securities providing positive exposure to one factor do not involve negative exposure to others. For example, it is possible to avoid overpriced low-risk stocks by also considering valuation criteria in the selection process.

Efficient factor strategies also use portfolio-construction processes designed to mitigate turnover and keep trading costs under control. The corporate bond market provides good examples of this. A company typically issues only one or two types of stocks common and preferred , but far more types of bonds.

Bonds of the same issuer can differ in the maturity date, issue size, currency, and subordination. These characteristics require careful treatment, especially in defining the factors and designing the investment process. Not all bonds from the same issuer are necessarily equally attractive: some might be cheap, others expensive.

Another example is the liquidity issues that arise in the corporate bond market. Unlike equity markets, bonds differ substantially in terms of their liquidity. Some bonds trade every day, but others trade only infrequently.

As a result, transaction costs can differ greatly from one issue to another. Being able to tackle these kinds of asset-specific implementation challenges in the most efficient way can have a significant impact on performance. But it typically requires a sophisticated approach. Investors should consider this as a key differentiator between efficient and not-so-efficient factor investing solutions. To conclude, most generic products expose investors to serious pitfalls, including chronic underperformance after costs and arbitrage risk.

Enhanced factor strategies provide an answer. Over the past decade, the financial industry has seen a structural shift as investors allocated funds from actively managed fundamental strategies to passive vehicles and factor investing strategies. How can investors benefit from factor premiums?

Predominantly institutional investors kicked off the rise of factor investing in the s, as they acknowledged the academic evidence for the existence of factor premiums. Large financial institutions followed suit. The case of a large European private bank illustrates how factor investing has been embraced globally. The bank had struggled with disappointing returns after the financial crisis and looked for products that offered better diversification. At the same time, they were looking to keep their average fee level relatively low.

Allocating more to passive solutions was not desired as this would have a negative impact on return expectations. On the other hand, allocating more to active fundamental strategies would not match with their relatively low average fee objective. Therefore, they started looking for other sources of return and started evaluating different factor managers.

In the early s, they jointly developed a multi-factor strategy with two global asset managers to be offered to their clients via their fund platform. As a response to the increased awareness for and interest in factor investing, asset managers and index providers have been very active in launching factor-based products across different asset classes. Today, the industry offers a variety of ways to implement the proven principles of factor investing. These range from public smart beta indices to proprietary active multi-factor multi-asset solutions.

With such a wide range of options available, how should investors go about choosing a factor strategy to invest in? To answer this question, they could start by answering a few pivotal questions:. Factor investing works in practice and many investors embrace it. There are many ways to implement factors in a portfolio, and numerous products are available in the market that can deliver the desired results.

Below are 15 multiple-choice questions on the 8 chapters you have completed. Click on the box that you think contains the correct answer. If you answer 12 or more questions correctly, you will be awarded 2 hours of CPD. Your feedback. Good luck! What is factor investing? In this chapter, you will learn: The basic principles behind factor investing When its foundations were laid That factor investing has rapidly gained popularity among investors Factor investing Factor investing is about investing in securities featuring certain characteristics that have proved to deliver higher risk-adjusted returns than the market over time, following a fixed set of rules.

Factor premiums Factor premiums have been extensively documented in academic literature for over four decades. Factor investing today Systematic In the ensuing years, prominent institutional investors have publicly embraced more systematic approaches to portfolio allocation and security selection based on these insights. Smart beta, quant and factor-based strategies Estimates of the amount of money invested in factor strategies vary from one source to another, ranging from USD 1 to 2 trillion globally in most cases.

Figure 1: Smart beta adoption percentage by region. Table 1: Three key concepts The definitions of concepts such as quantitative investing, factor investing, or smart beta are far from set in stone. Quant investing Quant investing can be defined as the use of quantitative data analysis and rules-based securities selection models to build portfolios in a systematic way. Factor investing Factor investing is a form of quant investing that is based on the exploitation of academically-proven factor premiums.

Smart beta Smart beta strategies explicitly target factor premiums and represent an alternative to traditional market capitalization-weighted indices beta. Source: Robeco To sum up, factor investing emerged from the first empirical tests of the CAPM in equity markets, in the s, to become a widespread investment approach nowadays. Monthly email updates.

Mark as read. Next chapter. This chapter shows: How factor investing fits between active and passive Why it is a proven concept Why so many investors have embraced it In recent years, active managers have been criticized over how much value they add relative to the fees they charge. Passive strategies But there are other concerns too.

Quantitative investment strategies Meanwhile, the rise of computational power and the ability to store and process an ever-greater amount of data at low cost have profoundly changed the way financial markets operate. Third way of investing The issues inherent in active and passive strategies have been instrumental in the rise of factor investing. The Guide to Factor Investing. Figure 2: Factor investing: a third way of investing. A proven concept Why has factor investing become so popular over recent years?

Previous chapter. The academic evidence for factor investing. This chapter explains: How factor premiums were discovered Which were the most important milestones for factor investing How current research goes well beyond equities and bonds CAPM Prior to the s, investors had very little understanding of the relationship between the risk and return of their investments. From Fama-French to Norway Three-factor model By the middle of the s, it was becoming clear that a number of factors other than market risk needed to be considered, and alternative models were developed.

Figure 4: Selected factor investing milestones for equities and bonds. Figure 5: Examples of concepts in the world of factor investing. Source: Robeco Meanwhile, others only seem to work over short periods of time, or in a limited number of segments of the market. What to look for in a factor Actually, it is possible to reduce the number of anomalies included in the zoo down to a handful of truly relevant factors.

Number of strict requirements So how exactly should we choose which factors to invest in? Table 2. Requirements factors should meet Performing Producing better risk-adjusted returns than the broad market over the long term Proven Able to overcome any attempts within academia and in-house research to discredit its validity Persistent Observable in different markets, stable over time, and robust to different definitions Explainable Having a plausible economic rationale for its existence, with strong academic underpinnings Executable Implementable in practice and still outperform after the effects of trading costs and other market frictions Source: Robeco.

A handful of broadly accepted premiums So, which factors actually work? Value, momentum, low risk and quality Another consideration is that while the most common factors typically apply to all asset classes, some asset managers or index providers also have a slightly different list of relevant factors for each asset class.

Table 4. Defining the most common factors Factor Defining Value The tendency of inexpensive securities, relative to their fundamentals, to outperform over the longer term. Momentum The tendency of securities that have performed well in the recent past to continue to perform well, and for securities that have performed poorly to continue to perform poorly.

Low risk Refers to the observation that low-risk securities tend to earn higher risk-adjusted returns than high-risk securities. Quality The tendency of securities issued by sound and profitable companies to outperform those issued by less sound and profitable companies, and the market as a whole. Size The tendency of bonds issued by companies with little debt outstanding and small-capitalization stocks to outperform the market. Source: Robeco In short, although dozens of market anomalies have been reported in the academic literature, investors should stick to a small number of factors that have been thoroughly tested in practice.

Enhance returns or reduce risk? This chapter explains: The historical performance of proven factors How factors can help achieve higher long-term returns The basics of low-risk investing. Enhancing returns Enhancing returns We saw in Chapter 2 that one of the most important transformations in the financial industry in recent years has been the massive shift from active to passive investment strategies, but that this raises a number of concerns.

Figure 6: Historical performance of proven equity factors. Figure 7: Historical performance of proven credit factors. Reducing downside risk In recent years, risk reduction has become a top priority for many investors. Higher risk-adjusted returns Virtually unknown barely a decade ago, low-risk investing has in the ensuing years become a broadly accepted and adopted approach. High tracking error This is why asset managers tend to focus on being able to deliver outperformance and on minimizing relative risk.

This chapter will show you: Some of the objectives leading investors to consider factor investing The mechanics at work behind each objective That different goals can be pursued simultaneously. Diversification benefits of factor investing The quest for more robust diversification techniques has seen many investors turn to factor investing — and with good reason.

Reduce costs Increased cost awareness among investors has also played a crucial role in the success of factor investing over the past few years. Rules-based approach The rules-based approach to generating superior performance is generally achieved at a lower cost, therefore charging lower fees, than traditional active managers.

Get specific factor exposure Another frequently cited goal is to gain exposure to a specific factor. Figure 8: Investment objectives that initiated evaluation of smart beta strategies. Generate income The quest for higher and more stable returns has convinced many investors to turn to strategies featuring high-income characteristics.

Other: achieving ESG targets The implementation of factor investing is also a good opportunity to consider environmental, social and governance ESG aspects. The different goals mentioned in Chapters 5 and 6 are not mutually exclusive and can be pursued simultaneously.

For example, investors can achieve both reduced downside risk and higher returns with efficient multi-factor approaches. What makes a factor strategy really efficient? In this chapter, you will learn: Why generic factor investing products may not be the best option How enhanced strategies address the pitfalls of generic products That asset-specific challenges must also be considered Multi-factor multi-asset solutions Investors can choose from hundreds of factor-based products, from basic single-factor equity ETFs to sophisticated multi-factor multi-asset solutions.

Inefficient generic products For instance, many generic products provide only limited exposure to a targeted factor, or combination of factors, as well as unwanted negative exposures to other proven factors. Smart beta indices Another major flaw of products that track public smart beta indices is that they are prone to overcrowding and arbitrage.

Table 5: Pitfalls of a generic approach and possible solutions Pitfalls of generic approach Enhanced factor approach Individual factors can have negative exposure to other proven factors Take into account other proven factors to avoid going against them High trading costs Robust portfolio-construction process keeps turnover and transaction costs low Concentration risk Research-based concentration limits for region, country, sector and single stocks Arbitrage risk Keeping the strategy only transparent for clients Source: Robeco Efficient factor strategies, by contrast, are designed in such a way that factor premiums do not clash with each other.

Why factor investing has been embraced How factor investing can be implemented Where to start when evaluating factor investing strategies Predominantly institutional investors kicked off the rise of factor investing in the s, as they acknowledged the academic evidence for the existence of factor premiums. Figure 9: European private bank embraces factor investing in portfolio allocation.

Source: Robeco In the early s, they jointly developed a multi-factor strategy with two global asset managers to be offered to their clients via their fund platform. Where to start? To answer this question, they could start by answering a few pivotal questions: Bound to a benchmark? Allocating to factors can lead to significant deviations from the market portfolio and periods of relative underperformance compared to well-known market indices.

For investors interested in factors, but wanting to stay relatively close to benchmark positions, enhanced index strategies would provide a solution. Which goals? Factor investing can help achieve a number of goals see Chapters 5 and 6. These goals will require different factor exposures. For instance, investors looking for protection against a market correction might want to increase their exposure to the low-risk or low-volatility factors. Investors aiming for higher returns may look into more return-seeking factors such as momentum.

Target single or multiple factors? Factors can be targeted individually, to fit the preferences made explicit by a client such as an allocation to the low-volatility factor for capital preservation. But one could also consider a strategy that provides exposure to multiple factors. For investors looking for more stable long-term outperformance across economic cycles, multi-factor strategies providing balanced exposure to a number of proven factors might be a more suitable option.

Generic or enhanced approach? Generic factor strategies, often marketed through index funds or ETFs, may appear as a relatively straight-forward and low-cost solution. However, as mentioned in Chapter 7 , going for the seemingly cheap option also means being exposed to a number of serious pitfalls such as relatively low factor exposures i.

This all could lead to disappointing investment results compared to enhanced factor strategies. Any sustainability considerations? Together with the massive rise of passive investing, growing demand for sustainable investment solutions is one of the major shifts that are currently reshaping the investment industry.

For investors interested in both factors and sustainability, the upshot is that these two approaches work well together. More details on this specific topic are described in Chapter 6. In recent years, factor investing has rapidly gained popularity among professional investors around the world.

Factor investing is not designed to fully replace active and passive management. Instead, it should be seen as a third way of investing. The origins of factor investing date back to the s, when empirical studies began to challenge the prevailing assumptions of the Capital Asset Pricing Model CAPM. Factor premiums were first documented in equity markets, but factor investing also applies in credits, government bonds, commodity markets, as well as in the multi-asset space.

Hundreds of factors have been reported, but many are variants of the same factor, or mere statistical coincidences. Most asset managers stick to a small set of proven factors such as value, momentum, low volatility, quality and size. A relevant factor needs to meet five key requirements.

It should be performing, proven, persistent, explainable and executable. Factor investing can help investors to achieve two main goals: enhance long-term returns and reduce downside risk. Depending on their needs and priorities, clients can seek exposure to different factor premiums, or to a combination of factor premiums. Factor investing can also help to achieve other goals, such as boosting diversification, gaining exposure to a specific factor that is a strategic interest, generating income and integrating sustainability.

All these goals are not mutually exclusive and can be pursued simultaneously, with efficient multi-factor strategies. They entail serious pitfalls, including negative exposure to proven factors, unnecessary turnover, concentration issues, as well as overcrowding and arbitrage risk. More sophisticated factor strategies can address these pitfalls. The rise of Factor Investing - is it just a hype? Do the test. What is the most appropriate definition of factor investing?

Choose the correct answer Factor investing is an effective risk management approach. Factor investing is about investing in securities with characteristics that have proved to achieve higher risk-adjusted returns than the market. Factor investing is characterized by the assumption that markets are fully efficient.

Which one is true? Choose the correct answer The adoption of smart beta including factor investing has grown the fastest in the US in The global adoption of smart beta has dropped slightly in recent years. What did the report on the Norwegian Government Pension Fund conclude? That the portfolio was very well diversified. Why did factor investing become so popular? Choose the correct answer It builds on years of academic research and works in practice.

It is a cheap way of gaining market exposure. The rise of computing power enabled the processing of a great amount of data. Passive strategies have advantages but also raise some concerns. Which of the below is a common concern? Choose the correct answer Passive investing requires a high-breadth investment universe. Passive investing leads to chronic underperformance, relative to the market, once costs are taken into account.

Passive investing applies unsophisticated factor definitions. What is true? Choose the correct answer The CAPM is an asset pricing model that establishes an exponential relationship between risk and return. According to research from the s, less volatile securities consistently outperform more volatile securities over time. Factor premiums were initially researched in the credit space due to the vast availability of data.

What is the right chronological order of academic factor investing milestones? Choose the correct answer Low volatility, value, size, momentum, three-factor model, quality. Size, value, low volatility, momentum, three-factor model, quality. Low volatility, value, momentum, size, quality. Which requirements should a factor meet to qualify as investible? Choose the correct answer Performing, proven and persistent, well-known. Proven, persistent, simple, explainable, executable.

Performing, proven, persistent, explainable and executable. Many factors have been reported by academics, but which factors are the most commonly used? Choose the correct answer Value, momentum, low risk, quality, size. Value, momentum, low risk, quality, and liquidity.

Momentum, seasonal trend, low risk, quality, size. Looking at the historical performance of proven factors, what conclusion can be drawn? Choose the correct answer Equity stocks with value, momentum and quality factors outperform over time. Factors cannot be found in the credit markets. Equity stocks with low-risk characteristics generate lower returns in the long run.

How can the anomaly of the low-risk factor best be explained? Choose the correct answer Only by the behavioral biases of investors, such as overconfidence. Behavioral biases, incentive structures and investment constraints, among others. Which investment goals can factor investing help to achieve? Choose the correct answer Enhance returns or reduce downside risk. Improve diversification or generate income. All of the above. Which are the most common pitfalls of generic factor approaches?

Choose the correct answer They often target novel, less-researched factors. They provide only limited exposure to the targeted factor or set of factors. High trading costs and low concentration in certain segments. What was the reason for the bank mentioned in Chapter 8 to investigate factor investing? Choose the correct answer Disappointing returns after the financial crisis and search for better diversification. Social proof from institutional investors and wealth of academic evidence.

Which item is most important when choosing a factor strategy? Choose the correct answer Lowest possible management fee. Choosing between a single- or a multi-factor strategy. Enhanced sustainability integration. Leave your details and receive the accreditation by email.

You can use this email to get your accreditation if you passed the test. Try test again. Improve score. See results. Your answers. Factor investing is an effective risk management approach. How can investors benefit from factor premiums? Predominantly institutional investors kicked off the rise of factor investing in the s, as they acknowledged the academic evidence for the existence of factor premiums.

Large financial institutions followed suit. The case of a large European private bank illustrates how factor investing has been embraced globally. The bank had struggled with disappointing returns after the financial crisis and looked for products that offered better diversification.

At the same time, they were looking to keep their average fee level relatively low. Allocating more to passive solutions was not desired as this would have a negative impact on return expectations. On the other hand, allocating more to active fundamental strategies would not match with their relatively low average fee objective.

Therefore, they started looking for other sources of return and started evaluating different factor managers. In the early s, they jointly developed a multi-factor strategy with two global asset managers to be offered to their clients via their fund platform. As a response to the increased awareness for and interest in factor investing, asset managers and index providers have been very active in launching factor-based products across different asset classes.

Today, the industry offers a variety of ways to implement the proven principles of factor investing. These range from public smart beta indices to proprietary active multi-factor multi-asset solutions. With such a wide range of options available, how should investors go about choosing a factor strategy to invest in? To answer this question, they could start by answering a few pivotal questions:.

Factor investing works in practice and many investors embrace it. There are many ways to implement factors in a portfolio, and numerous products are available in the market that can deliver the desired results. Below are 15 multiple-choice questions on the 8 chapters you have completed. Click on the box that you think contains the correct answer. If you answer 12 or more questions correctly, you will be awarded 2 hours of CPD.

Your feedback. None of the shares may be offered or sold, directly or indirectly in the United States or to any U. Robeco does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U. Person within the meaning of Regulation S promulgated under the Securities Act. This website is intended for use only by non-U. Persons outside of the United States within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.

Person investors. Persons within the meaning of Regulation S under the Securities Act , iv you are, or are a discretionary investment adviser representing, a non-U. Person within the meaning of Regulation S under the Securities Act located outside of the United States and v you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts as defined in Regulation S under the Securities Act in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.

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This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice.

The value of the investments may fluctuate. Past performance is no guarantee of future results. 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. For investment professional use only.

Not for use by the general public. Good luck! What is factor investing? In this chapter, you will learn: The basic principles behind factor investing When its foundations were laid That factor investing has rapidly gained popularity among investors Factor investing Factor investing is about investing in securities featuring certain characteristics that have proved to deliver higher risk-adjusted returns than the market over time, following a fixed set of rules.

Factor premiums Factor premiums have been extensively documented in academic literature for over four decades. Factor investing today Systematic In the ensuing years, prominent institutional investors have publicly embraced more systematic approaches to portfolio allocation and security selection based on these insights. Smart beta, quant and factor-based strategies Estimates of the amount of money invested in factor strategies vary from one source to another, ranging from USD 1 to 2 trillion globally in most cases.

Figure 1: Smart beta adoption percentage by region. Table 1: Three key concepts The definitions of concepts such as quantitative investing, factor investing, or smart beta are far from set in stone. Quant investing Quant investing can be defined as the use of quantitative data analysis and rules-based securities selection models to build portfolios in a systematic way. Factor investing Factor investing is a form of quant investing that is based on the exploitation of academically-proven factor premiums.

Smart beta Smart beta strategies explicitly target factor premiums and represent an alternative to traditional market capitalization-weighted indices beta. Source: Robeco To sum up, factor investing emerged from the first empirical tests of the CAPM in equity markets, in the s, to become a widespread investment approach nowadays. Monthly email updates. Mark as read. Next chapter. This chapter shows: How factor investing fits between active and passive Why it is a proven concept Why so many investors have embraced it In recent years, active managers have been criticized over how much value they add relative to the fees they charge.

Passive strategies But there are other concerns too. Quantitative investment strategies Meanwhile, the rise of computational power and the ability to store and process an ever-greater amount of data at low cost have profoundly changed the way financial markets operate. Third way of investing The issues inherent in active and passive strategies have been instrumental in the rise of factor investing. The Guide to Factor Investing. Figure 2: Factor investing: a third way of investing.

A proven concept Why has factor investing become so popular over recent years? Previous chapter. The academic evidence for factor investing. This chapter explains: How factor premiums were discovered Which were the most important milestones for factor investing How current research goes well beyond equities and bonds CAPM Prior to the s, investors had very little understanding of the relationship between the risk and return of their investments.

From Fama-French to Norway Three-factor model By the middle of the s, it was becoming clear that a number of factors other than market risk needed to be considered, and alternative models were developed. Figure 4: Selected factor investing milestones for equities and bonds.

Figure 5: Examples of concepts in the world of factor investing. Source: Robeco Meanwhile, others only seem to work over short periods of time, or in a limited number of segments of the market. What to look for in a factor Actually, it is possible to reduce the number of anomalies included in the zoo down to a handful of truly relevant factors. Number of strict requirements So how exactly should we choose which factors to invest in?

Table 2. Requirements factors should meet Performing Producing better risk-adjusted returns than the broad market over the long term Proven Able to overcome any attempts within academia and in-house research to discredit its validity Persistent Observable in different markets, stable over time, and robust to different definitions Explainable Having a plausible economic rationale for its existence, with strong academic underpinnings Executable Implementable in practice and still outperform after the effects of trading costs and other market frictions Source: Robeco.

A handful of broadly accepted premiums So, which factors actually work? Value, momentum, low risk and quality Another consideration is that while the most common factors typically apply to all asset classes, some asset managers or index providers also have a slightly different list of relevant factors for each asset class.

Table 4. Defining the most common factors Factor Defining Value The tendency of inexpensive securities, relative to their fundamentals, to outperform over the longer term. Momentum The tendency of securities that have performed well in the recent past to continue to perform well, and for securities that have performed poorly to continue to perform poorly.

Low risk Refers to the observation that low-risk securities tend to earn higher risk-adjusted returns than high-risk securities. Quality The tendency of securities issued by sound and profitable companies to outperform those issued by less sound and profitable companies, and the market as a whole. Size The tendency of bonds issued by companies with little debt outstanding and small-capitalization stocks to outperform the market.

Source: Robeco In short, although dozens of market anomalies have been reported in the academic literature, investors should stick to a small number of factors that have been thoroughly tested in practice. Enhance returns or reduce risk? This chapter explains: The historical performance of proven factors How factors can help achieve higher long-term returns The basics of low-risk investing.

Enhancing returns Enhancing returns We saw in Chapter 2 that one of the most important transformations in the financial industry in recent years has been the massive shift from active to passive investment strategies, but that this raises a number of concerns. Figure 6: Historical performance of proven equity factors. Figure 7: Historical performance of proven credit factors. Reducing downside risk In recent years, risk reduction has become a top priority for many investors.

Higher risk-adjusted returns Virtually unknown barely a decade ago, low-risk investing has in the ensuing years become a broadly accepted and adopted approach. High tracking error This is why asset managers tend to focus on being able to deliver outperformance and on minimizing relative risk. This chapter will show you: Some of the objectives leading investors to consider factor investing The mechanics at work behind each objective That different goals can be pursued simultaneously.

Diversification benefits of factor investing The quest for more robust diversification techniques has seen many investors turn to factor investing — and with good reason. Reduce costs Increased cost awareness among investors has also played a crucial role in the success of factor investing over the past few years.

Rules-based approach The rules-based approach to generating superior performance is generally achieved at a lower cost, therefore charging lower fees, than traditional active managers. Get specific factor exposure Another frequently cited goal is to gain exposure to a specific factor. Figure 8: Investment objectives that initiated evaluation of smart beta strategies.

Generate income The quest for higher and more stable returns has convinced many investors to turn to strategies featuring high-income characteristics. Other: achieving ESG targets The implementation of factor investing is also a good opportunity to consider environmental, social and governance ESG aspects. The different goals mentioned in Chapters 5 and 6 are not mutually exclusive and can be pursued simultaneously.

For example, investors can achieve both reduced downside risk and higher returns with efficient multi-factor approaches. What makes a factor strategy really efficient? In this chapter, you will learn: Why generic factor investing products may not be the best option How enhanced strategies address the pitfalls of generic products That asset-specific challenges must also be considered Multi-factor multi-asset solutions Investors can choose from hundreds of factor-based products, from basic single-factor equity ETFs to sophisticated multi-factor multi-asset solutions.

Inefficient generic products For instance, many generic products provide only limited exposure to a targeted factor, or combination of factors, as well as unwanted negative exposures to other proven factors. Smart beta indices Another major flaw of products that track public smart beta indices is that they are prone to overcrowding and arbitrage. Table 5: Pitfalls of a generic approach and possible solutions Pitfalls of generic approach Enhanced factor approach Individual factors can have negative exposure to other proven factors Take into account other proven factors to avoid going against them High trading costs Robust portfolio-construction process keeps turnover and transaction costs low Concentration risk Research-based concentration limits for region, country, sector and single stocks Arbitrage risk Keeping the strategy only transparent for clients Source: Robeco Efficient factor strategies, by contrast, are designed in such a way that factor premiums do not clash with each other.

Why factor investing has been embraced How factor investing can be implemented Where to start when evaluating factor investing strategies Predominantly institutional investors kicked off the rise of factor investing in the s, as they acknowledged the academic evidence for the existence of factor premiums. Figure 9: European private bank embraces factor investing in portfolio allocation. Source: Robeco In the early s, they jointly developed a multi-factor strategy with two global asset managers to be offered to their clients via their fund platform.

Where to start? To answer this question, they could start by answering a few pivotal questions: Bound to a benchmark? Allocating to factors can lead to significant deviations from the market portfolio and periods of relative underperformance compared to well-known market indices. For investors interested in factors, but wanting to stay relatively close to benchmark positions, enhanced index strategies would provide a solution.

Which goals? Factor investing can help achieve a number of goals see Chapters 5 and 6. These goals will require different factor exposures. For instance, investors looking for protection against a market correction might want to increase their exposure to the low-risk or low-volatility factors. Investors aiming for higher returns may look into more return-seeking factors such as momentum. Target single or multiple factors? Factors can be targeted individually, to fit the preferences made explicit by a client such as an allocation to the low-volatility factor for capital preservation.

But one could also consider a strategy that provides exposure to multiple factors. For investors looking for more stable long-term outperformance across economic cycles, multi-factor strategies providing balanced exposure to a number of proven factors might be a more suitable option.

Generic or enhanced approach? Generic factor strategies, often marketed through index funds or ETFs, may appear as a relatively straight-forward and low-cost solution. However, as mentioned in Chapter 7 , going for the seemingly cheap option also means being exposed to a number of serious pitfalls such as relatively low factor exposures i. This all could lead to disappointing investment results compared to enhanced factor strategies.

Any sustainability considerations? Together with the massive rise of passive investing, growing demand for sustainable investment solutions is one of the major shifts that are currently reshaping the investment industry. For investors interested in both factors and sustainability, the upshot is that these two approaches work well together. More details on this specific topic are described in Chapter 6.

In recent years, factor investing has rapidly gained popularity among professional investors around the world. Factor investing is not designed to fully replace active and passive management. Instead, it should be seen as a third way of investing.

The origins of factor investing date back to the s, when empirical studies began to challenge the prevailing assumptions of the Capital Asset Pricing Model CAPM. Factor premiums were first documented in equity markets, but factor investing also applies in credits, government bonds, commodity markets, as well as in the multi-asset space. Hundreds of factors have been reported, but many are variants of the same factor, or mere statistical coincidences.

Most asset managers stick to a small set of proven factors such as value, momentum, low volatility, quality and size. A relevant factor needs to meet five key requirements. It should be performing, proven, persistent, explainable and executable. Factor investing can help investors to achieve two main goals: enhance long-term returns and reduce downside risk. Depending on their needs and priorities, clients can seek exposure to different factor premiums, or to a combination of factor premiums.

Factor investing can also help to achieve other goals, such as boosting diversification, gaining exposure to a specific factor that is a strategic interest, generating income and integrating sustainability. All these goals are not mutually exclusive and can be pursued simultaneously, with efficient multi-factor strategies.

They entail serious pitfalls, including negative exposure to proven factors, unnecessary turnover, concentration issues, as well as overcrowding and arbitrage risk. More sophisticated factor strategies can address these pitfalls.

The rise of Factor Investing - is it just a hype? Do the test. What is the most appropriate definition of factor investing? Choose the correct answer Factor investing is an effective risk management approach. Factor investing is about investing in securities with characteristics that have proved to achieve higher risk-adjusted returns than the market.

Factor investing is characterized by the assumption that markets are fully efficient. Which one is true? Choose the correct answer The adoption of smart beta including factor investing has grown the fastest in the US in The global adoption of smart beta has dropped slightly in recent years. What did the report on the Norwegian Government Pension Fund conclude? That the portfolio was very well diversified. Why did factor investing become so popular? Choose the correct answer It builds on years of academic research and works in practice.

It is a cheap way of gaining market exposure. The rise of computing power enabled the processing of a great amount of data. Passive strategies have advantages but also raise some concerns. Which of the below is a common concern? Choose the correct answer Passive investing requires a high-breadth investment universe.

Passive investing leads to chronic underperformance, relative to the market, once costs are taken into account. Passive investing applies unsophisticated factor definitions. What is true? Choose the correct answer The CAPM is an asset pricing model that establishes an exponential relationship between risk and return.

According to research from the s, less volatile securities consistently outperform more volatile securities over time. Factor premiums were initially researched in the credit space due to the vast availability of data. What is the right chronological order of academic factor investing milestones?

Choose the correct answer Low volatility, value, size, momentum, three-factor model, quality. Size, value, low volatility, momentum, three-factor model, quality. Low volatility, value, momentum, size, quality. Which requirements should a factor meet to qualify as investible? Choose the correct answer Performing, proven and persistent, well-known. Proven, persistent, simple, explainable, executable. Performing, proven, persistent, explainable and executable.

Many factors have been reported by academics, but which factors are the most commonly used? Choose the correct answer Value, momentum, low risk, quality, size. Value, momentum, low risk, quality, and liquidity. Momentum, seasonal trend, low risk, quality, size. Looking at the historical performance of proven factors, what conclusion can be drawn? Choose the correct answer Equity stocks with value, momentum and quality factors outperform over time.

Factors cannot be found in the credit markets. Equity stocks with low-risk characteristics generate lower returns in the long run. How can the anomaly of the low-risk factor best be explained? Choose the correct answer Only by the behavioral biases of investors, such as overconfidence.

Behavioral biases, incentive structures and investment constraints, among others. Which investment goals can factor investing help to achieve? Choose the correct answer Enhance returns or reduce downside risk. Improve diversification or generate income. All of the above. Which are the most common pitfalls of generic factor approaches? Choose the correct answer They often target novel, less-researched factors.

They provide only limited exposure to the targeted factor or set of factors. High trading costs and low concentration in certain segments. What was the reason for the bank mentioned in Chapter 8 to investigate factor investing? Choose the correct answer Disappointing returns after the financial crisis and search for better diversification.

Social proof from institutional investors and wealth of academic evidence. Which item is most important when choosing a factor strategy? Choose the correct answer Lowest possible management fee. Choosing between a single- or a multi-factor strategy. Enhanced sustainability integration. Leave your details and receive the accreditation by email.

You can use this email to get your accreditation if you passed the test. Try test again. Improve score. See results. Your answers. Factor investing is an effective risk management approach. The adoption of smart beta including factor investing has grown the fastest in the US in It builds on years of academic research and works in practice.

Passive investing requires a high-breadth investment universe. The CAPM is an asset pricing model that establishes an exponential relationship between risk and return. Low volatility, value, size, momentum, three-factor model, quality. Performing, proven and persistent, well-known.

Value, momentum, low risk, quality, size. Equity stocks with value, momentum and quality factors outperform over time. Only by the behavioral biases of investors, such as overconfidence. Enhance returns or reduce downside risk. They often target novel, less-researched factors. Disappointing returns after the financial crisis and search for better diversification.

Lowest possible management fee.