Monday 15 June 2020

An advocate for factor investing

Hans Fahlin, Chairman of Inquire Europe, lends his insight to Dutch trade outlet ‘Pensioen Pro’.

Investors believe that the tide will eventually turn for factor investing, but according to Dutch institutional trade outlet Pensioen Pro, the urge to engage is waning for many pension investors. Hans Fahlin discusses the state of affairs in a recently published article:

Factor strategies haven not beaten the broad stock market for years. This hasn’t changed during the corona crisis either. Poor performance can largely be explained by the underperformance of value stocks, and also the size factor.

According to investors, the fact that factor investing has yielded poor returns in recent years is not due to the factors themselves, but unfavourable market conditions. In recent years, factor investors have also had a relatively large exposure, especially via the value factor, to sectors with structural problems, such as banks, real estate, energy companies and car manufacturers. That, too, has negatively affected returns.

Hans Fahlin, CIO of the Swedish pension fund AP2: ‘We have now gone through a long period of steady but low growth, very low interest rates and no inflationary pressure. An ideal environment for growth stocks, bad for value,' says Fahlin, whose fund has been managing its equity portfolios largely on a factor-based basis since 2004. ‘But all factors have periods of time when they are not doing so well’.

The underperformance of value has lasted a long time. ‘As value equities become even cheaper, it becomes increasingly difficult to say goodbye to them. What's more, there is still so much academic evidence that factor investing works,' responds Fahlin, who is also Chairman of Inquire Europe, an organisation which promotes research into quantitative investment.

It remains to be seen whether adjustments can bring factor investing back on top. But even if that does not succeed, it seems unlikely that pension funds will withdraw quickly.

One advantage is that ESG criteria can easily be incorporated into a factor approach, Fahlin says. AP2 invests 80% of its assets itself. ‘Factor investing is after all an efficient way of managing portfolios. If we were to invest in a fundamental way, we would need a lot more staff.’

Access the original article via: Pensioen Pro

Access the full article translated to English via this link.


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