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Factor-based investing – the third pillar

In our first white paper on factor-based fund management, we would like to give interested investors an insight into the history and current characteristics of this asset management approach.
Dr. Carsten Große-Knetter, Thierry Misamer ODDO BHF Asset Management, November 2018

Introduction

Institutional investors have adapted their asset allocation to a changed market environment in recent years. Persistently low interest rates and volatile equity markets have had an impact on the assessment of the risks associated with passive and fundamental investment strategies. While passive strategies inevitably increase market risk in times of rising volatility, it has become increasingly challenging for fundamental-based asset managers to consistently outperform their benchmarks. Both approaches will continue to have their place in the portfolios of professional investors. However, the role of factor-based strategies as a third pillar is likely to grow in order to contribute to generating consistent, predictable outperformance.


Multi-factor strategies, which ODDO BHF Asset Management has been successfully offering for more than 14 years now, contribute to portfolio diversification and thus to risk reduction. Yet for many investors, this raises questions: What factors should we focus on? How stable are the negative correlations between different factors? Can factor strategies sustainably generate alpha?

In our first white paper on factor-based fund management, we would like to give interested investors an insight into the history and current characteristics of this asset management approach. Looking back shows that the basis for factor premiums is scientifically and empirically sound. A practical look helps to better understand how factor-based strategies can work in the portfolio context. These strategies are not a panacea, but when used correctly, they help improve portfolio efficiency significantly.

Read the full report: Factor-based investing – the third pillar