Many institutional investors lack a clear understanding of the factor exposures across their equity portfolios, said a new report from Northern Trust Asset Management.
Fifty-one percent of global investors surveyed said they were “moderately certain” of their overall portfolios' actual risk-factor exposures, 27% said they were “fairly certain,” 18% said they were “very certain,” and 4% said they were “unaware,” the report said.
Investors' top concerns about their overall equity portfolios were “overexposure to certain factors/regions,” followed by “absolute volatility,” “unexpected factor bias within the overall combined exposure” and “tracking error vs. benchmark.”
The firm surveyed 139 investors in the U.S., Europe, U.K., Asia, Africa and Middle East. About 45% of the respondents had more than $1 billion in assets, each.
Drawing from the survey and an analysis of three pension funds from the U.S., Europe and U.K., the report also found that investors who employ a range of active and passive strategies often have a neutral factor exposure despite their intentions to tilt to one or more factors.
“When you have such a large basket (of managers/styles), you tend to get a lot of canceling out,” said Matthew Peron, senior vice president and managing director of global equity at Northern Trust Asset Management, in a telephone interview.
To resolve this, investors should make “deliberate” and “substantial commitments” to factor-based equity strategies.
“You really need to take a larger, more meaningful, more significant tilt … if you want to move the needle,” Mr. Peron said.
Mr. Peron added that he expects investors' interest in risk-factor investing to spread to other asset classes such as fixed income.
