Risk factor investing is no panacea for cross-asset investors, but it does represent a seismic shift in portfolio design and philosophy. The decomposition of portfolio risks on a factor basis rather than on an asset class basis will often require an about-turn of the mindset of the cross asset investor, but when achieved, will allow for more targeted portfolio objectives, realigning expected risks and rewards across the portfolio and finally giving true meaning to the word ‘diversified’.
Toby Hayes is a portfolio manager at Franklin Diversified Income Fund
Key features
Cross-asset investors are questioning the efficacy of traditional approaches, having witnessed the failure of risk models over the 2008 crisis.
Some investors have taken a different approach, moving away from traditional assets into ‘alternatives’.
Risk factors are expected to generate a positive premium and therefore must have a sound economic rationale for their existence.
