Factor Investing in Practice: A Trustees' Guide to Implementation

Forthcoming in Journal of Portfolio Management

Posted: 7 Feb 2014 Last revised: 2 Feb 2016

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 - Tinbergen Institute Amsterdam (TIA)

Date Written: February 6, 2014

Abstract

Factors represent certain parts in the market, which are more attractive in the long term than other parts. In the case of equities for example, leading academic studies demonstrate that momentum, small cap and low-volatility stocks systematically generate higher risk-adjusted returns. Factors can also be applied in other asset classes such as bonds. Strategically allocating toward factors is called factor investing.

The prospect of higher risk-adjusted returns is obviously appealing to institutional investors. Many are investigating the opportunities provided by factor investing. This leads to a new question: how can factor investing be embedded in the investment management process?

In this study, our focus is therefore on the practical aspects. We analyze how pension funds and other institutional investors: - can implement new insights concerning factor investing; - work with the factors that drive asset returns as a portfolio construction tool; - change the investment models they use; - learn from peers that have already taken the steps towards implementation.

We also review hurdles of the implementation process and analyze the reasons behind them. Our findings are translated into a checklist for implementing factor investing. We find that three approaches to factor investing are emerging and we discuss case studies to examine how these approaches are implemented and correspond to our checklist.

A point about our relationship with Robeco. Robeco considers factor investing as essential for its institutional and other professional clients. It does extensive research on this matter and supports external research. This external research is not limited to the theory, but includes the challenges investors face when implementing research findings. Therefore, we were given the assignment to write this research report.

Keywords: Factor Investing, Regulatory Perspectives, Checklist, Case Studies

JEL Classification: G11, G12, G15, G23

Suggested Citation

Koedijk, Kees G. and Slager, Alfred and Stork, Philip A., Factor Investing in Practice: A Trustees' Guide to Implementation (February 6, 2014). Forthcoming in Journal of Portfolio Management. Available at SSRN: https://ssrn.com/abstract=2391694 or http://dx.doi.org/10.2139/ssrn.2391694

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

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

Alfred Slager (Contact Author)

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

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Philip A. Stork

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

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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