New CAMRADATA whiteaper examines the effectiveness of factor investing strategies in the current economic climate

CAMRADATA has published a new whitepaper on Factor Investing that considers how factor investing has grown from a niche strategy to attracting sizeable investment flows, as well as the opportunities and challenges for investors in applying ‘new’ risk premia.

The whitepaper includes views from investment managers who attended a recent ‘factor investing’ roundtable in London including, BNY Mellon Investment Management, Eaton Vance, Quonium, bfinance, Cardano, MJ Hudson, Redington, River and Mercantile Solutions and Spence.

 
Established risk premia for equities strategies include low volatility, momentum, value, size and quality. However, beyond this, asset managers are applying a wider range of alternative risk premia to enhance the risk-return profile of a multi-asset portfolio. The aim is to deliver diversification, through having low correlation with “traditional” risk premia, as well as enhanced return.
 
The whitepaper also considers how well risk premia/factor investing strategies are performing in current economic conditions and which categories of investor are driving demand for this investment approach.
 
Sean Thompson, Managing Director, CAMRADATA, says: “Taking advantage of advances in computing power, data management and algorithmic trading models, quantitative investment managers have been driving innovation in factor investing techniques, seeking more creative ways of capturing risk premia from a widening spread of investment factors.
 
“Our panellists discussed the opportunities for applying these ‘new’ risk premia and for deepening this approach across fixed income, currencies and other asset classes. They also considered whether investors and investment consultants have access to the data and research they need to drive these factor investing strategies.”
 
Key takeaway points from the roundtable were:
 
• The take-up of Alternative Risk Premia strategies (ARPs) is rising. Consultants at this year’s CAMRADATA ARP roundtable were positive about the diversifying attractions of these strategies.
 
• There are concerns and revisions on the nature of ARP’s within investment portfolios, in part because of the most renowned and popular strategies lost more than 10 per cent in 2018.
 
• There is growing interest from new adopters, with existing investors in ARPs re-evaluating and rotating out of one or two names but they are not meaningfully exiting the class.
 
• ARPs are not correlated with major asset classes, which is not the same as negatively correlated. Clients should not expect ARPs to provide inverse positive returns when major asset classes fall.
 
• The discussion highlighted how investment thesis and portfolio construction explain some of the wide diversity in ARPs’ returns.
 
• There is neither a fixed list of risk premia nor a single approach to accessing them. All roundtable participants agreed that deciding how to extract and combine risk premia was an evolutionary process.
 
• Investors need to refine their understanding of risk premia better, to reap diversification from more defensive elements such as Quality and the Low Vol anomaly when correlations between markets and ARPs in aggregate rise.
 
The roundtable guests also discussed trading and agreed on the need for more transparency on trading costs; admitting they are reliant on managers to supply data.
 
Sean Thompson, Managing Director, CAMRADATA, adds: “The original appeal of risk premia investing, over a decade ago, was as a systematic alternative to fundamental active management. This roundtable was a reminder that systematic does not mean static.
 
“Our panellist agreed that risk premia are in practice differentiated by the breadth of the available market and trading costs. As risk premia investing gains traction, so managers and clients are understanding the different characteristics across asset classes more and more.”