As we recently said in our post, systematic factors have historically been sensitive to macroeconomic and market forces but not in the same way. For example, some, such as Value, Momentum and Size have been pro-cyclical, meaning they outperformed when economic growth and volatility were rising.
We’ve observed that many institutional investors have abandoned their historical domestic-equity bias and now view global equities as a single, broad asset class. In high-growth economies, however, particularly in Asia, Central and Eastern Europe, Africa and Latin America, many investors remain focused primarily on domestic stocks.
IMPLEMENTING FACTORS THOUGH MULTI-FACTORS INDEX ALLOCATIONS-- A NEW APPROACH FOR INSTITUTIONAL MANDATESDec 3, 2013 Learn More
Let’s look at how factor allocations fit in the traditional institutional portfolio setting. Factor investing utilizing indexes can be viewed as active decisions implemented through passive replication. As such, factor allocations should be tailored to each institution.