The attempts by pension funds and endowments to earn equity premiums by incorporating factor-based funds into their portfolios has fallen short, instead leaving them with uncompensated risks. This according to a recent article inInstitutional Investor.
The article cites data from Northern Trust Asset Management’s (NTAM) analysis of 500 complex institutional portfolios over the past five years. The study found that “institutions weren’t getting the results they wanted,” for a number of reasons:
· “Targeted factor exposures are being offset by the other managers held in asset owner portfolios, creating index-like outcomes at higher fees;”
· Many endowments and retirement plans have “invested in poorly designed factor-based funds, which don’t efficiently deliver the premiums that investors are counting on;”
· Portfolios are often “stocked with so many managers with similar holdings that the potential for outperformance is essentially diversified away.”
The article cites comments from NTAM’s head of quantitative strategies, Michael Hunstad, who said, “The whole exercise of factor investing is delineating between the risks you get paid for and the risks you don’t. The challenge is you want to define the value, quality or other factor in such a way that you get the good stuff and eliminate all the uncompensated risks. That’s really hard to do.”