Investors of large pension funds or insurance companies should care about factors. They are systematic drivers of portfolio risk and return and at the heart of risk management tools.
c drivers of portfolio risk and return and at the heart of risk management tools. Within smart beta, factor investing is the latest innovation in the field. These techniques aim to identify combinations of rewarded investment risk factors such as Value, Size or Quality that may be capable of improving levels of portfolio diversification, generating incremental performance relative to traditional market-cap indexes and/or reducing risk. Therefore, factor allocation should be part of an overall asset-allocation decision.
To facilitate the decision-making process, however, institutional investors need to develop a comprehensive understanding of the role factor investing can have in their portfolios.
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