EDHEC-Risk Institute Provides An Academic Framework To Maximise The Benefits Of Factor Investing For Institutional Investors

The relevance of factor investing is gaining acceptance amongst sophisticated investors. The approach recommends that allocation decisions be taken in terms of risk factors, as opposed to standard asset class decompositions.

When many asset classes plunged together during the 2008 market downturn despite their apparent differences, it became increasingly apparent that a seemingly well-diversified portfolio could exhibit a concentrated set of factors. When adopted, the factor perspective helps investors understand the sources of risk and return of various assets, and better assess a portfolio’s level of diversification. Yet, some ambiguity remains with respect to what factors should be used and how factor investing should be implemented.

In a new publication entitled “Smart Beta and Beyond: Maximising the Benefits of Factor Investing”, EDHEC-Risk Institute, with the support of Amundi ETF, Indexing & Smart Beta, provides useful pedagogical clarification with respect to the benefits of factor investing in an institutional context. To this end, this paper proposes a “taxonomy” to classify the practically relevant notions of factors and discusses how they connect to various meaningful investment contexts.

EDHEC-Risk Institute draws an important distinction between two main types of benefits that can be expected from factor investing:

ü  the allocation perspective, where the use of factors allows for a better structuration of the investment process, both from an asset-only perspective and from an asset-liability management perspective; and

ü  the benchmarking perspective, where the use of factors allows for a more efficient harvesting of risk premia.

While a rich literature is now available on equity factors, having led to the production of dedicated smart factor indices, efforts are to be made to document the role of factors in strategic allocation decisions across asset classes. A particularly relevant effort relates to a detailed analysis of the existence and persistence of rewarded risk factors in fixed income. EDHEC-Risk Institute is proud to announce the launch of a new ambitious effort on factor investing in bond markets, again with the support of Amundi ETF, Indexing & Smart Beta.

“Our partnership with EDHEC-Risk Institute demonstrates our commitment to addressing investor needs through education and research. Having previously focused our attention on equity-based factor investing together with EDHEC-Risk, we are pleased to expand our research to fixed income factor investing and lay the foundations for a rigorous and academically-backed framework. This will shed light on a number of important questions for investors and help them tackle their asset allocation challenges”, said Fannie Wurtz, Managing Director at Amundi ETF, Indexing & Smart Beta.