Trow: QE has squashed factor investing for credit. If you are investment grade in euros you are at the party; if you are not, you are not. Murphy: There is a timing element, too. People are recognising the benefit of multi-factor diversification and say, not allocating all of their exposure to value. But at what point do they shift their exposure? Inves- tors may want to move towards a more multi-factor approach, but in taking some of that value exposure off the table, they may miss that inflection point where value rebounds, which is historically where we have seen a lot of the outperformance. Leeuwen: We would advise clients to diversify as much as possible, using different styles. When we are implementing factor investing in credit our approach is to use equally weighted portfolios, small bets and a large number of names to avoid idiosyncratic risk. It is not the Holy Grail but there’s added value in it and the way to harvest it is to diversify all the styles. It is key to stabilising your results. Scott: There are so many other things that are coming into it, such as cash-flow investment, LDI and defensive structured equity. This is another one. They are getting swamped with ideas. At the end of the day, performance is what we as trustees look at and when that is not happening…
PI: Should investors be concerned about overcrowding? Barron: In the long-only equity space there is a lot of capacity left in factors. In pure factors, we have a long way to go. History tells us that there are some concerns. Small cap disappeared in the 1980s and then came back.
14 September 2019 portfolio institutional roundtable: Factor investing
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