Achmea Investment Management began its journey into factor investing in earnest in 2011, just after Freddy van Mulligen had joined the company, by introducing low-volatility managers. Overall, low-volatility stocks generated amazing results for investors in the years to follow.
“When we introduced low-volatility investing to our clients, it was a relatively new proposition,” he says. “Now it’s huge, especially among institutional investors in the Netherlands, and it has been a fantastic story: the same, or even a higher return [than the MSCI World], but with less risk.”
The good experience with low-vol managers helped Achmea IM make a radical decision in September 2014: to centre its entire investment process around low-vol and four additional factors: value, momentum, quality and size. To avoid value traps we prefer to combine value with momentum.
While some institutional investors have shifted most of their money to index trackers, Van Mulligen remains loyal to active managers, at least for now.
The Dutchman says the switch to factor investing was quite a logical one for Achmea IM. “We already used a multi-manager approach and had always had a value manager in our portfolios, so it wasn’t as big a step for us.”
The fact that most of Achmea IM’s clients are (Dutch) pension funds also helped.
“We believe a long-term exposure to value, momentum, low volatility, quality and small caps provides a factor premium, in addition to the equity risk premium,” says Van Mulligen. “This long-term focus also fits very well with the investment horizon of institutional investors.”
The graph below shows how factor indices have performed versus the MSCI World over the past three years.
However, pure factor investing also has its pitfalls.
Low-vol strategies, for example, may have shown superior performance on the long term, but recently they haven’t quite: over the past year, low volatility equities have underperformed the MSCI World by more than 50%.
For many investors, such a short-term underperformance may be just too much to stomach.
“Last year was difficult for factor managers because markets were adrift,” comments Van Mulligen.
Another danger associated with factor investing is that by allocating equally to several factors you may end up buying the market.
“If you buy value, you buy high volatility stocks, and if you buy low-vol stocks, you tend to get stocks with high valuations,” Van Mulligen says.
So how do you prevent this from happening? He thinks the option of trying to time factors isn’t prudent.
“If you take big bets in timing factors, you can make a lot of money, but you can also lose a lot.”