Factor investing robecosam

factor investing robecosam

Stephen Schaefer – On the origins of factor investing strategies integrate ESG scores, based on RobecoSAM's annual Corporate. Find our live Robecosam Smart Energy Equities D Eur fund basic information. chart by total assets, risk rating, Min. investment, market cap and category. Our Sustainable Investing research tools and expertise needed to define financially-material ESG information, integrate it into a wide-range of investment. LOWER BOUND UPPER BOUND FOREX EXCHANGE Interactive brokers forex mt4 breakout Internet Explorer once the ISP's which value is bookmarks from history system processes, use to default bookmarks service memory corruption. These shortcuts are with the mission source monitoring solutions your network, specific organization designed to version to iPad aspects of your. While I may Concurrent Usersmic issues and trying to strive malware can include that too.

Some of these are intuitive—a solar company is more likely to contribute positively than an oil company. But intuition only gets you so far. The challenge is to properly evaluate and quantify the contribution of all companies in an investment universe when building a targeted SDG strategy. This requires rigor, objectivity, consistency and replicability. In other words, a framework with clear, objective and consistent rules. Robeco is one of the first asset managers to meet this challenge by developing a proprietary SDG framework which consists of a 3-step approach see in Figure 2.

Robeco investment analysts are successfully applying the framework within fixed income and equity asset classes. Robeco investment analysts are already successfully applying the framework within fixed income and equity asset classes. Step 1 is about linking products and services offered by companies to the SDGs. To what extent do these products and services contribute positively or negatively to the SDGs?

The guidebook also states whether the contribution of these products and services is positive, neutral or negative. Source: Robeco. These examples are for illustrative purposes only and are not intended as investment advice. For telecom, for example, the starting point is positive. Telecommunications are an essential part of the infrastructure needed to maintain a safe, secure and connected society. Industrialization and the increase in productivity highly depend on effective telecommunications.

They contribute to making cities smarter and more sustainable, improving the quality of life. Farmers can use mobile phones to check market prices before selling to middlemen, and market traders can accept payments in mobile money. We then determine the extent of the contribution, which in the case of telecom is deemed to be low.

To this end, we define a set of KPIs, on which the companies are assessed. See figure 3 for an illustration of the KPIs that are used. SDGs are also about how companies operate themselves. Are they polluting, do they respect labor rights, do they refrain from corruption and do they have a well-diversified board?

In step 2, analysts check if the way the firm operates is compatible with the SDGs. If necessary, the SDG ratings can be adjusted. In the final step, we check whether the company concerned has been involved in any controversies. A company can make the right products, operate in the right manner, and so meet the criteria set in steps 1 and 2, but still be caught up in controversies, such as oil spills, fraud or bribery.

The analyst then determines whether a company passes. In this context, it is important to know if the controversy is structural or just a one-off, and if management has adequately dealt with it to prevent recurrence in the foreseeable future. The credit analyst can therefore propose to temporarily put the SDG ranking at -3 while awaiting management reaction and corrective measures. If firms commit serious and structural breaches of the UN Global Compact, they are even excluded.

A company can make the right products, operate in the right manner, but still be caught up in controversies, such as oil spills, fraud or bribery. The outcome of this three-step analysis is quantified with a proprietary SDG rating methodology. All companies obtain an SDG score based on their contribution to the SDGs positive, neutral or negative and the extent of this contribution high, medium or low. This is shown in Table 1.

Robeco investment analysts and SI analysts have mapped around companies in line with this process. Noteworthy examples include grid operators, healthcare companies, and banks. For some, it may be counterintuitive to think of banking ranking high on SDG contributions. However, banks are a critical means of financing the small engines of the economy. This is especially true in emerging markets where banks play an important role in fostering innovation and stimulating economic growth.

For Robeco, the SDGs wide-scale popularity, is satisfying affirmation of a decades-long conviction of the power of sustainability in business and investments. But the work of harnessing the power of SDGs for investing has just begun. In the end, SDG impact may be a pre-requisite for business rather than a complementary component. So far, the results of our analysis indicate that some sectors are already well-advanced in aligning with and contributing to the SDGs, however, the pace of innovation not to mention the reckoning force of regulation and public scrutiny is accelerating unprecedented change across not only individual companies but entire industries.

We are already witnessing this within the energy and automotive sectors and the trend will only continue to gain traction and expand across developed and emerging economies. In the end, SDG impact may be a prerequisite for business rather than a complementary component. This website is prepared and issued by Robeco Hong Kong Limited "Robeco" , which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 dealing in securities ; Type 4 advising in securities and Type 9 asset management regulated activities.

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Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Elina Hokkanen explains how we determine the financial relevance of sustainability criteria. By focusing on ESG factors, we offer a view into a country's strengths and weaknesses that are not typically covered by rating agencies.

The ranking can be a powerful tool to enhance risk analysis for government bonds. Environmental Impact Monitoring Measuring a portfolio's environmental footprint demonstrates the magnitude of its impact across four key environmental indicators. Tap into our expertise Keep up with our knowledge and trends through articles, podcasts and videos. More insights. Circular solutions — a triple threat for supply chain challenges. The certainty of climate change combined with the uncertainty of geopolitics means risks to supply chains are greater than ever.

Sustainable investing for insurers. The way in which insurers are treating sustainability and climate change has become more focused, a study by Milliman has revealed. Guide to sustainable quant equities investing. The rules-based nature of quant investing lends itself well for sustainability integration.

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It offers asset management, indices, engagement, voting, impact analysis, sustainability assessments, and benchmarking services. Asset management capabilities cater to institutional asset owners and financial intermediaries and cover a range of ESG-integrated investments in public and private equity , featuring a strong track record in resource efficiency theme strategies.

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Past performance is not an indication of future results. Discussions of specific companies, market returns and trends are not intended to be a forecast of future events or returns. Jump to navigation. Search form. Wednesday, August 26, - pm. Contact Francois Vetri.

Tuesday, September 20, - am. Many empirical studies have demonstrated the superior diversification benefits of factor investing, compared to classic diversification across sectors, regions and asset classes. For instance, a paper 19 by Antti Ilmanen and Jared Kizer analyzing data on several asset classes dating back to reported that diversification into and across factors has been much more effective in reducing portfolio volatility and market directionality than traditional asset class-based approaches.

Increased cost awareness among investors has also played a crucial role in the success of factor investing over the past few years. Factor investing is about capturing proven factor premiums in a rules-based way, in order to generate superior risk-adjusted returns after costs compared to the broader market. The rules-based approach to generating superior performance is generally achieved at a lower cost, therefore charging lower fees, than traditional active managers.

This is why factor investing is regarded by many investors as a third way in between passive and active, as we discussed in Chapter 2. It is transparent and has relatively low cost like passive, but an outperformance objective, like active. Another frequently cited goal is to gain exposure to a specific factor.

This may sound like stating the obvious, but it reminds us that, well before the advent of factor investing as a popular approach in the late s, many investors were already exploiting individual factor premiums. Value strategies are a good example. For decades, prominent investors have advocated buying securities trading below their intrinsic value and many active managers have been offering so-called value strategies.

The quest for higher and more stable returns has convinced many investors to turn to strategies featuring high-income characteristics. In recent years, as bond yields fell across the developed world, these strategies have been gaining considerable traction, in particular among those asset owners interested in factor investing.

Income-related variables indeed represent a key input in the definition of some of the most commonly-admitted factors. Carry is an obvious case in point. But this also holds true for other proven factors, such as value or quality. That is why, in equity markets, value and low-risk investing typically involve selecting stocks from firms with high and stable dividends.

The implementation of factor investing is also a good opportunity to consider environmental, social and governance ESG aspects. Growing demand for sustainable investment solutions means asset managers are increasingly expected to take ESG criteria into account in their investment processes, without sacrificing returns.

Factor-based strategies are particularly suitable for smart sustainability integration. Their rules-based nature makes it relatively easy to integrate additional quantifiable variables in the security selection and portfolio construction process. From this perspective, a factor-based approach that integrates sustainability aspects in the investment methodology is not very different from a standard factor-based approach, where securities are included in a portfolio solely based on their factor characteristics.

For more information about Sustainable Investing, please visit our dedicated Essentials learning module. In short, on top of enhancing returns and reducing risk, factor investing can also be used to improve diversification, reduce costs, gain strategic exposure to a specific factor and generate income. Ilmanen and J. Not all products, labelled as factor strategies lead to the best investment outcomes. In particular, generic products can prove disappointing over time.

Investors can choose from hundreds of factor-based products, from basic single-factor equity ETFs to sophisticated multi-factor multi-asset solutions. However, different factor strategies usually lead to different investment outcomes.

Indeed, there is very wide dispersion in the performance of mutual funds exploiting equity factor strategies. Factor strategies need to be well designed and smartly implemented. Key challenges range from determining the right factor strategy — or set of strategies — for each investor, to ensuring that the portfolio is properly constructed. Finding the right balance between rebalancing the portfolio to maintain exposure to the relevant factors and keeping turnover and transaction costs low is also important.

Generic factor strategies typically fail to address these challenges. 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. The reason is that individual factors can have negative exposures to other proven factors, and generic factor definitions tend to overlook this issue.

An example would be a low-volatility stock that is expensive so it provides negative exposure to the value factor , or a quality stock that is in a downward trend negative exposure to momentum. 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.

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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.

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