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
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