Strategic Issues in Strategic Issues in Factor Investing Factor - PowerPoint PPT Presentation

Strategic Issues in Strategic Issues in Factor Investing Factor Investing Andrew Ang February 2015

Factors, not asset classes

Factors, not asset classes Factor premiums don’t come without risk

Factors = Factors = Nutrients Nutrients

Investment Factors Investment Factors Equities Bonds Represent the “average” investor 5

Value vs Growth Value vs Growth 20 15 10 MKT Value Growth 5 0 1927 1937 1947 1957 1967 1977 1987 1997 2007 -5

Factors Go Beyond Asset Classes Factors Go Beyond Asset Classes Each factor premium is the reward for bearing risk in a different set of bad times

Value: Rational Value: Rational Theories Theories Value vs Growth

Value: Behavioral Theories Value: Behavioral Theories

CPPIB: Factor Investor CPPIB: Factor Investor

Factor Investing a la CPPIB Factor Investing a la CPPIB $1 Private Equity $1.3 Public Equity—$0.3 Bonds =

Factor Investing a la CPPIB Factor Investing a la CPPIB $1 Real Estate $0.6 Public Equity+$0.4 Bonds =

Factor Investing a la CPPIB Factor Investing a la CPPIB Consider the CAPM with a beta of 1.3      ( ) 1.3 ( ) E r r E r r i f m f      ( ) [ 0.3 1.3 ( )] E r r E r      i f m $1 $1 Private Equity = Long Stocks, Short Bonds Real Estate = Long Stocks, Long Bonds

Norway: Factor Investor Norway: Factor Investor

GPFG Active Returns 1 70% 0.5 0 -0.5 -1 -1.5 Fitted Whole Sample -2 Fitted Expanding Window Actual -2.5 2007:01 2007:06 2008:01 2008:06 2009:01 2009:06

How Do You Do It?

Factors Assets

Who holds the market portfolio? Are you different from average?

Value Value

Momentum Momentum

Equities Equities

Buying Low and Selling High Buying Low and Selling High Rebalance over factors, just as you rebalance over equities and bonds

Industry Developments Industry Developments

Industry Developments Industry Developments Alpha Alpha

Industry Developments Industry Developments

Investor Needs Factors + Alpha in Illiquid Markets Factors + Alpha in Liquid Markets Factor Index

Asset management isn’t really about Asset management isn’t really about the management of assets the management of assets

It is all about factors It is all about factors