Ortec Finance advocates factor-based approach to asset-liability management

Ortec Finance is rolling out an asset-liability matching tool based around factor investing principles.

The Anglo-Dutch technology and consultancy firm presented the model to clients last week, demonstrating how it believes a strategic implementation of investment factors could be used to meet a pension scheme’s objectives.

The strategy uses analysis of a scheme’s existing exposure to the carry, value, momentum and low volatility factors across its equity, government bond, credit, and foreign exchange exposures, Hens Steehouwer, head of research at Ortec Finance, told IPE.

It then attempts to optimise the portfolio’s “strategic factor exposures” to best meet the client’s objectives based on risk profile, investment time horizon and liabilities.

The strategy can also be adapted to take into account a scheme’s currency and interest rate hedging strategies and its strategic asset allocation.

“The key element of the strategy that’s different to traditional factor investing is working across asset classes,” Steehouwer said.

“The factors we use must have been shown to work across different asset classes – not just equities but government bonds, credit, and foreign exchange, and not just at the security level but at country index level.”

By implementing factors at an index level or using an overlay strategy, investors could avoid potential liquidity issues that could be experienced when trading individual securities, he added.

The model was created based on research by Jules van Binsbergen, professor at the Wharton School at the University of Pennsylvania, and Ralph Koijen, professor at New York University’s Stern School of Business.

“Factor-based investing often forms part of an investment strategy, but is generally brought in at an operational level and viewed as part of the tactical implementation,” Steehouwer said. “From research and real-life case studies undertaken in recent years, we’ve seen clear evidence for the analysis and optimisation of factor exposures impacting the strategic risk and return profile of an institutional investor.”

Access this month’s IPE Special Report on Factor Investing here.