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By
Willem Jellema, CFA, Portfolio Manager,
Joop Huij, PhD, Quantitative Researcher and
Simon Lansdorp, PhD, Quantitative Researcher
Willem Jellema,
CFA, Portfolio Manager
Joop Huij,
PhD, Quantitative Researcher
Simon Lansdorp,
PhD, Quantitative Researcher
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Investors increasingly allocate to factor premiums such as size, value, momentum and low volatility
The momentum effect means that stocks that have performed well in the recent past to continue to perform well
The momentum factor has a relatively high premium and provides attractive diversification benefits because of
low correlation with other factors
A conventional momentum strategy takes on high risks and incurs large transaction costs
Robeco Momentum Equities harvests the momentum premium in an efficient way by avoiding unrewarded risks
and limiting transaction costs
Introduction
Factor investing, which advocates looking
beyond traditional asset classifications and
allocating to factor premiums such as size,
value, momentum and low volatility, is taking
ground. Especially since the publication of an
influential report for Norges Bank Investment
Management,1 one of the largest investment
managers in the world, an increasing number
of institutional investors allocates to factor
premiums, while more are interested. At
Robeco, we embrace the concept of factor
investing. Since 2006 Robeco manages
Conservative Equity strategies to capture
the low-volatility premium for equities. At
the beginning of 2012, we introduced Robeco
Conservative Credits as our low-volatility
solution for credit markets. As of August 2012,
we also offer Robeco Momentum Equities
as our solution to efficiently harvest the
momentum factor.
We believe there is a strong case for investors
to allocate to momentum in their factor
portfolios. In this note we will explain why
and we will discuss Robecos approach to
momentum investing. Not only will we explain
the momentum effect and its attractive features
within a factor portfolio context, we will also
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Ang, Goetzmann and Schaefer, Evaluation of Active Management of the Norwegian Government Pension Fund Global, Norwegian Ministry of Finance, 2009.
Jegadeesh and Titman, Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency, Journal of Finance, 48, 1993.
See, e.g., Chordia and Shivakumar, Momentum, Business Cycle, and Time-varying Expected Returns, Journal of Finance, 57, 2002.
See, e.g., Gutierrez and Pirinsky, Momentum, Reversal, and the Trading Behavior of Institutions, Journal of Financial Markets, 10, 2007.
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Source: David Blitz, Strategic Allocation to Premiums in the Equity Market, Journal of Index Investing, 2012.
Correlations are calculated in excess of the market premium. The sample period is from July 1963 to December 2009.
See, e.g., Rouwenhorst, International Momentum Strategies, Journal of Finance, 53, 1998, for evidence on the existence of the momentum effect in European markets,
and Rouwenhorst, Local Return Factors and Turnover in Emerging Stock Markets, Journal of Finance, 54, 1999, for evidence of the momentum effect in emerging markets.
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See, e.g., Fama and French, Dissecting Anomalies, Journal of Finance, 63, 2008.
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For more information on factor investing, we refer to our note by David Blitz, Joop Huij, Simon Lansdorp and Pim van Vliet, Efficient factor-investing strategies, of February 2013.
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David Blitz, Joop Huij and Martin Martens, Residual Momentum, Journal of Empirical Finance, 18, 2011.
De Groot, Huij and Zhou, Another look at trading costs and short-term reversal profits, Journal of Banking and Finance, 36, 2012
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Conclusion
Institutional investors are increasingly
allocating strategically towards factor
premiums. To meet this demand, Robeco
introduced Robeco Momentum Equities
in August 2012. The momentum factor is
attractive from a factor investing point of view
as it offers investors a potentially high premium
and attractive diversification opportunities.
The Robeco approach to momentum investing
is designed to capture the momentum
premium in an optimal manner by avoiding
unrewarded risks and boosting returns by
limiting transaction costs.
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Contact
Robeco (Headquarters)
P.O. Box 973
3000 AZ Rotterdam
The Netherlands
www.robeco.com/quant
Important information
This document has been carefully prepared by Robeco Institutional Asset Management B.V. (Robeco). It is intended to provide readers with
information on Robecos specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products.
All figures are as at the end of the month under review, unless stated otherwise.
The information contained in this document is solely intended for professional investors within the meaning of the Dutch Act on the Financial
Supervision (Wet financieel toezicht) or persons which are authorized to receive such information under any other applicable laws.
The information contained in this publication is not intended for users from other countries, such as US citizens and residents,
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Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice.
The prospectuses are available on request and free of charge from www.robeco.com.
The content of this document is based upon sources of information believed to be reliable, but no warranty or declaration,
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