Northern Trust Asset Management recently conducted a survey of 139 global institutional investors.
The survey found only 18 per cent of global investors were ‘very certain’ of the risk factor exposure across their listed equity portfolios, while 51 per cent were only ‘moderately certain’ and 31 per cent were either ‘fairly uncertain’ or ‘unaware’ of their exposures.
According to the study, the top concern of managers of listed equity portfolios was overexposure to certain factors and regions, followed by absolute volatility, unexpected factor bias within the overall combined exposure and tracing error versus benchmark.
Northern Trust managing director of institutional distribution John Krieg said if the key concern is overexposure to a certain factor or region, the ability to “look across the portfolio to understand how that exposure looks is imperative”.
“The fact that fewer than one in five respondents felt certain of their factor exposures shows the difficulty of monitoring a large, complex institutional portfolio,” he said.
The study, which included an in-depth analysis of three pension funds in the UK, Europe and the US along with the survey results, found significant allocations to factor-based equity strategies help achieve investor objectives more effectively.
Mr Krieg said an experimental approach to factor-based investing will not, however, produce the desired results.
“Investors have a greater likelihood of success if they make a substantial commitment to these strategies,” said Mr Krieg.
Northern Trust’s managing director of global equity, Matthew Peron, said a study of the successful implementation of factor-based strategies at four large institutions shows the first step for institutions is understanding their current portfolio.
The study also indicated a failure to base future investment decisions on a strong understanding of the institution’s current portfolio can lead to unintended bias or cancel out intended bias.
Northern Trust also recommended using engineered equity strategies to provide “more risk-efficient and cost-effective outcomes while still achieving your performance goals”.
Mr Peron said engineered equity strategies aim to capture exposure to specific factors, either individually or in combination, to meet investors’ specific goals.
“Engineering exposure to certain factors while engineering out unintended exposures are both equally critical to achieving objectives,” said Mr Peron.
“Our analysis showed that to realise noticeable results, you need to make a deliberate and substantial commitment to engineered equity strategies.”
