Implementation considerations for factor investing
Institutional investors should care about factors. They are systematic drivers of portfolio risk and return and at the heart of risk management tools. A more recent offering is the introduction of smart beta—or factor-investing techniques—to the allocation decision of many institutions.
Investors looking to enhance risk-adjusted returns may seek a certain risk profile. Factor-investing can build relevant, outcome-oriented solutions for them. Their specific set of objectives and constraints will determine the appropriate factor allocation. Once the desired factors have been determined, they will need to think about how to implement the investment strategy. During this phase, it is crucial that investors understand the important trade-offs to be made to achieve a diversified and consistent exposure to the desired or targeted factors. The FTSE Russell research paper is to provide institutional investors with the right questions and help them develop a further understanding of the role of factor investing in their decision-making process.