Factor indices can add value and change equity risk profile

The STOXX indexing firm launched a set of factor indices that show the value of holding selected factor risk exposures. In all cases around the globe, there is a return to risk benefit from holding a low volatility index. There are varying degrees of return to risk benefit from other style factors. Generally, there is always higher return for holding the factor index. A blend of factors will improve return with about the same amount of risk as the benchmark. Placing some factor tilts in a portfolio will benefit investors as measured by past history.

The performance of different factors differs by geographical regions. Holding value in the US is not the same as holding value in Asia and Europe. Equity style factors have a mixed set of correlations, so there is a diversification benefit from holding different factor exposures.

Nonetheless, there are no guarantees that these style factor premiums will always perform well. For example, the value factor has been underperforming especially in Europe, and there is a wide difference in momentum performance between Europe and Asia (APAC). Low risk has done poorly in the US but  has shown better returns in poorer performing Europe. There is a wide gap between Asia quality and the rest of the world. However, blending into a multi-factor index will have good smooth returns.    

Index providers are all generating factor indices which makes it easier to measure and track factor effects. What the historic record shows is that there are wide differences between style factors and regional performance that requires a closer look before any factor investing decision is made. Still, holding factor tilts may be an effective way at changing the equity exposure in a portfolio.