Investing in Systematic Factor Premiums

Revised version: European Financial Management Forthcoming

66 Pages Posted: 30 Oct 2013 Last revised: 1 Sep 2015

See all articles by Kees C. G. Koedijk

Kees C. G. Koedijk

Tilburg University - Department of Finance

Alfred Slager

Tilburg University - TIAS School for Business and Society

Philip A. Stork

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Multiple version iconThere are 2 versions of this paper

Date Written: October 29, 2013


Investments in certain segments of the market realize better returns over longer periods than those in other segments. Leading academic studies from the eighties onwards demonstrate, for instance, that value, momentum, smallcap and low-volatility stocks systematically generate higher risk-adjusted returns.

Investments in these segments or factors are also known as anomalies, as these factors cannot be explained by classic investment theories. However, allocation by institutional investors to strategies that explicitly capitalize on the benefits of these factors is now supported by academic research.

This report takes as its starting point the study by researchers Ang, Goetzmann and Schaefer (2009) for the Norwegian Government Pension Fund, the first such study to explicitly recommend factor investing. This pension fund is one of the largest active investors in the world. When in 2008 ten years' worth of cumulative outperformance was wiped out, the fund launched an investigation to evaluate the effects of active management. The researchers concluded that the exposure to factor premiums clearly accounted for the fund's results. Their conclusion is clear: factor investing must be part of the strategic asset allocation of institutional investors. However, this begs further questions: •what is the added value of factor investing? •what are these underlying factors? •how can a pension fund best put together a portfolio?

This report provides answers to these questions. As a follow-up to the study by Ang, Goetzmann and Schaefer, it is very topical, as many institutional investors are investigating the opportunities provided by factor investing.

In addition to covering the theoretical aspects of factor investing, this study facilitates discussion between directors and regulators on optimum investment horizons. Institutional investors are particularly worried that recent financial developments will force them to operate increasingly over a shorter horizon. However, the strength of an institutional investor lies precisely in earning risk premiums over the long term, without losing sight of short-term risk premiums.

At the moment, we are completing a second study that focuses specifically on the practical side of factor investing. It delves deeper into the discussion points that arise when using factor investing.

Finally, a point about our relationship with Robeco. Robeco values factor investing highly and is also doing extensive research on this matter, but wanted an external, independently academic view to support its investigations. Hence we were given the task of writing this report.

Keywords: Factor Investing, European Data, Optimization, Timing

JEL Classification: G11, G12, G15, G23

Suggested Citation

Koedijk, Kees G. and Slager, Alfred and Stork, Philip A., Investing in Systematic Factor Premiums (October 29, 2013). Revised version: European Financial Management Forthcoming, Available at SSRN: or

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

Alfred Slager

Tilburg University - TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB

Philip A. Stork (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS

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