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Matthias Knab, Opalesque: BlackRock writes on Harvest Exchange:
In my many conversations with investors and industry peers about factor investing, one topic seems to always come up: factor investing timing. I've had recent discussions on this topic with a central bank whose managers need to think about preserving capital and with a more nimble RIA team which explicitly wants to use timing to pursue incremental returns.
Factors, which are broad, historically persistent drivers of return, are inherently cyclical: Because each factor is driven by different phenomena, they tend to outperform at different times. How can investors aim to take advantage of this cyclicality of factor premiums in funds?
Our view: Market timing is difficult to accomplish, and with factors, it is no different. Rushing in and out of a factor strategy can cause harm to long-term returns and erode a portfolio's diversification. That said, factors do demonstrate some cyclicality, which offers opportunity to improve the prospects of a diversified factor portfolio.
We believe there is a better way. When using factors in your investing strategy, rather than going in and out of factors, consider starting with a portfolio that is well diversified across key factors. Most investors can rebalance to those strategic factor weights.
Some inves...................... To view our full article Click here
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