The institutional investors who wish to maximise the benefits of factor investing should make their allocation decisions based rather on risk factors, as opposed to standard asset class decompositions, according to EDHEC-Risk Institute which provided an academic framework for factor investing.
In a publication, “Smart Beta and Beyond: Maximising the benefits of factor investing”, with the support of Amundi ETF, Indexing and Smart Beta identified a distinction between two main types of benefits that could be expected from factor investing:
- The allocation perspective where the use of factors allowed for a better structuration of the investment process,
- The benchmarking perspective, where the use of factors allowed for a more efficient harvesting of risk premia
According to the firm, the factor perspective helped investors understand the sources of risk and return of various assets and to better assess portfolio’ levels of diversification.
EDHEC-Risk Institute stressed there was a need to provide a document on the role of factors in strategic allocations decisions across asset classes.
Therefore, EDHEC-Risk Institute together with Amundi ETF expanded an analysis on factor investing into bond markets.
Amundi ETF’s managing director, Fannie Wurtz said: “Having previously focused our attention on equity-based factor investing together with EDHEC-Risk, we are pleased to expand our research to fixed income factor investing and lay the foundations for a rigorous and academically-backed framework.”
“This will shed light on a number of important questions for investors and help them tackle their asset allocation challenges.”