How our multi-factor approach provides diversifying benefits for institutional investors
With multi-factor investing, we offer institutional investors a diversifying investment style. In doing so, we rely on a broad, balanced mix of factors. This way, we ensure that your portfolio is not overly concentrated on a single company or factor.
Thomas Kieselstein
Chief Investment Officer
How are alpha factors defined?
We use a dynamic mix of factors including value, quality and sentiment/momentum. Our bottom-up signal mix at the single-stock level targets stocks with positive exposure to a broad range of factors. Factor weightings are adjusted dynamically. We do not use external or commercially available factor indices. The result: a portfolio based on a well-diversified set of factors.
| Value | Quality | Sentiment | Carry* |
| Favourable valuation – lower quality and higher risk. | High profitability – expensive valuation. | Performance follows trends – risk of losses if trend is broken. | High absolute return – high risk/possible drawdowns. |
Two examples of how our balanced multi-factor approach works:
- According to our philosophy, value is not the search for so-called ‘fallen angels’ – i.e. companies that have suffered severe valuation declines, but rather the focus is on securities that are favourably valued, taking into account attractive quality characteristics.
- This also applies to the growth and momentum styles, which typically prefer volatile, highly valued companies. Our philosophy is to identify companies that are growing as profitably as possible but are not yet too expensive. In this way, we aim to avoid investing in extreme valuations.
Why multi-factor instead of single factor?
A factor approach achieves the best results when we combine the individual factors into a multi-factor forecast. The combined forecast is more stable and diverse compared to the individual factors. However, it is important that the factor allocation of the portfolio are well diversified to avoid concentration or correlation risks.
“In our integrated approach to multi-factor investing, factors complement each other. We target stocks that have positive exposure to a broad range of factors.”
Thomas Kieselstein
Chief Investment Officer
The various individual factors are not combined in a top-down portfolio mix, but with a bottom-up mix of signals at the individual security level. This integrated approach has a much higher aggregate exposure to factors at portfolio level than a portfolio mix approach, where the various factor exposures tend to cancel each other out.
Advanced factors for more diversification and alpha
Many factor approaches use simple, often one-dimensional factor definitions. We not only include more data, but also information that we obtain from machine-learning approaches based on our proprietary research.
These alternative factors, known as advanced factors, further develop our alpha forecast model. They do not correlate with previously used information, are based on structured alternative data and suggest outperformance. These include, for example:
- Director’s dealings and investment fund holdings (since 2011)
- Information on short sales and patent data (since 2018)
Use of conventional and alternative data in the definition of factors
Monthly forecasting process
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1.
We calculate returns for value, sentiment and quality for small, medium and large caps. At the end of each month, we rank all stocks within each size category based on various factor-based metrics. The most attractive stocks are ranked in the top decile of their respective factor category, while the most expensive stocks are ranked in the bottom decile.
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2.
We are interested in the difference in returns between the portfolios in the top and bottom deciles. These differences form the basis for generating a monthly multi-factor alpha forecast. To rank stocks, we consider the information contained in all three types of factors simultaneously through our alpha forecast model.
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3.
The projected returns are incorporated into the portfolio construction process along with the projected risks.
