The general philosophy of systematic equity investing and Factor investing is based on the idea that sustained long-term performance can be achieved through a well-diversified exposure to rewarded equity factors which are expected to effectively capture risk premia and optimize the risk budget of a portfolio.
By structuring investment signals into a disciplined investment process, quantitative portfolio managers are generally less susceptible to emotional biases, as they rely on model-driven decisions guided by a systematic approach to portfolio construction.
In that respect, a Multi-Factor process generally consists in combining factors such as Value, Quality, Low Volatility, Momentum, Size, with the objective to:
- Capture long-term excess return i.e., risk premium, provided by each individual factor’s payoff profile;
- Mitigate risk through the risk-based combination of factors and the diversification they offer due to their different and complementary market cycles.
A systematic quantitative equity strategy can be an effective approach to meet various objectives, including ESG, while simultaneously achieving return and risk targets.
More precisely, alpha could be generated through a combination of Multi-Factor exposure and a wide spectrum of climate and sustainability dimensions. However, sources of alpha, as well as sustainability measures, change over time, making it essential to actively monitor and dynamically adjust the portfolio.
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