Risk & Reward

Risk & Reward - 4th issue 2023

Risk & Reward Q4 2023

Invesco has always been a multi-asset, multi-style investment manager, with a strong focus on quantitative techniques and factor investing. We use our quarterly journal, Risk & Reward, to present innovative and timely analysis from our quantitative investment teams seeking to improve forecasting, risk management, and portfolio performance across the asset management landscape. This winter 2023 issue of Risk & Reward is no exception. 

Factor investing continues its rapid integration into the mainstream - largely due to its simplicity, transparency, and rules-based approach. But details matter, and a key differentiator between various investment managers rests in the definitions they use for their factors. At Invesco, we believe investors should diversify not only across factors, but also across the signals within those factors. A neutralized multi-signal factor approach may have several advantages. Learn why inside.

China's A-share market has a reputation for being particularly inefficient, making it an ideal hunting ground for active managers. But how should an investor go about finding the right portfolio mix? Which is better - qualitative plus fundamental or quantitative and model-driven? As is often the case, the answer lies somewhere between the extremes - and there may just be such a thing as an optimal allocation between styles. Find out more in our second article.

Turning to ESG, the plethora of benchmarks in this space can be confusing, and ESG indices often come with a high tracking error versus traditional benchmarks. Is there perhaps a better alternative to strategies that closely track common ESG benchmarks? Our article presents different indices and an ESG-oriented factor strategy that could eliminate some of the problems navigating the ESG benchmark maze. 

Finally, we look at a little-regarded issue that can profoundly impact portfolio composition: modeling of non-trading days in risk forecasting. While common practice is to introduce bias, we've tested several alternatives and come to a very clear conclusion about how the reality of days without live pricing can be reflected in risk modeling.

We hope you enjoy this issue of Risk & Reward.

Featured insights

Click below to read the featured articles within this edition of Risk & Reward.

  • Leveling%20up%20factor%20performance:%20a%20multi-dimensional%20approach

    Leveling up factor performance: a multi-dimensional approach

    By Satoshi Ikeda, Sergey Protchenko and Viorel Roscovan, Ph.D.

    Subtle differences in factor definitions can profoundly impact performance, and a crucial decision is whether to rely on a single or multiple factor signals. We present an approach that may help investors improve factor premiums by diversifying across signals and removing exposures to unrewarded risks.

  • Quantitative%20strategies%20to%20optimize%20Chinese%20A-share%20allocation

    Quantitative strategies to optimize Chinese A-share allocation

    By Andrew Tong

    Numerous studies indicate that China’s A-share market exhibits significant inefficiencies, which can be exploited by both fundamental and quantitative strategies. We compare the performance of the two styles, explain some of the differences and derive the optimal quant share.

  • ESG:%20Navigating%20the%20benchmark%20maze

    ESG: Navigating the benchmark maze

    By Julian Keuerleber, David Mischlich and Alexander Tavernaro

    Investors face a plethora of ESG benchmarks – making for a landscape that is often confusing and fraught with uncertainty about which one to choose. We feel the time has come to seek greater clarity.

  • Modeling%20non-trading%20days%20in%20risk%20forecasting

    Modeling non-trading days in risk forecasting

    By Moritz Brand, Alexandar Cherkezov and Dr. David Happersberger

    Forecasting daily market risk involves a number of practical difficulties, like that presented by public or bank holidays, when exchanges are closed and prices sit still. To account for these non-trading days, most risk models assume a daily return of zero – but there may be better alternatives.

Investment risks

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Important Information

  • Data as of October 31, 2023 unless otherwise stated.

    This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.

    Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice.