Unsophisticated Techniques Of Equity Factor Investing Still Prevail

EDHEC Risk Institute, in collaboration with ERI Scientific Beta, surveyed 114 investment professionals between June and September 2017 about their motivation and interests with regard to equity factor strategies. It found that many, especially on the asset owners’ side of things, were strikingly distant from the state-of-the-art in analytical approaches in this field.

Unsophisticated Techniques of Equity Factor Investing Still Prevail

Who Were the Respondents?

The respondents were a diverse group in several respects. In terms of geography: though more than half the respondents come from Europe, close to a quarter each come from North America and the rest of the planet. As to the function of the respondents professionally: the largest group were portfolio or fund managers. Another 20% were CEOs or managing directors of investing institutions, 10% were associates or analysts and another 10% were (gasp) vice presidents.

When the respondents were asked whether they actually used a multifactor framework for equity investment, 73% said “yes,” 18% said “not yet, but I am going to do so,” and the remaining 9% said simply “no.”

Who Were the Analysts?

EDHEC has now posted an analysis of the results of the survey of this group. This analysis has three authors: Noël Amenc, professor of finance at EDHEC Risk and CEO of ERI Scientific Beta; Felix Goltz, head of applied research at EDHEC-Risk; and Veronique Le Sourd, a senior research engineer there.

One striking finding is that a multi-factor strategy is quite often implemented in the context of passive investment. Even when the investing is dynamic, the factors are usually based on risk budget management, not an active view of expected returns.

Specifically, 31% of the survey respondents who manage assets say that they use factors passively, and 46% of the respondents who own the assets say the same.

On performance, although 55% of managers say that they allocate dynamically “on the basis of views on the future short-term or medium-term performance of factors,” only 15% of the owners say that.