How factor investing strengthens the multi-asset portfolio

Achieving an excess return regardless of the market environment - this is possible by picking those companies that perform above average in the factors "value", "quality" and "momentum".

Authors: Fabian Ackermann, Elias Lipp

Systematic investment strategies ultimately lead to a more robust portfolio (

With 1,480 shares, the MSCI World Index tracks the largest listed stocks in developed countries. This large number of companies makes it almost impossible for fund managers who rely on a fundamental investment process to analyse all stocks in detail. For this reason, a large number of securities are usually excluded at an early stage based on various criteria.

Differences to the systematic investment strategy

In contrast to the fundamental investment strategy, a systematic approach continuously assesses the entire investment universe according to certain criteria. Stock picking is usually carried out by an algorithm based on a certain scheme and free from any psychological influences. A database, which forms the core of the stock selection, is absolutely key.

In a systematic strategy, a so-called rebalancing is usually carried out at regular intervals, in which the stocks in the portfolio are exchanged to a predefined extent. In principle, the number of shares is determined by the defined tracking error (deviation of a portfolio's performance from its benchmark) of the respective strategy. A lower tracking error requires a larger equity universe compared to a higher tracking error.

Factors are subject to cycles

When developing systematic strategies - in this case factor strategies - it is worth taking several factors into account in the model. In Zürcher Kantonalbank's asset management, these are "value", "momentum" and "quality". The advantage of such a multi-factor strategy is that although many factors have historically been able to generate alpha over a sufficiently long period of time, they are still subject to cycles. This is partly due to the short-term thinking of many investors, which in turn leads to inflows and outflows that influence relative valuations and therefore future returns. Multi-factor strategies can mitigate these cycles to a certain extent. The following chart illustrates the cyclicality of the three styles "Momentum", "Value" and "Quality" in the US market.

Performance of the "momentum", "value" and "quality" factor groups in the USA (source:, Zürcher Kantonalbank as of January 31, 2024)

The chart shows that all styles have repeatedly experienced short-term periods of weakness over the past 24 years. However, there were only three years in total in which all styles were negative. In order to achieve further positive diversification effects, the three styles in our multi-factor model consist of several selected sub-factors, all of which are based on defined decision criteria. The most important criteria include, for example, a low correlation with the existing model and a high level of evidence over a long period of time. The selected sub-factors are reviewed on an ongoing basis and - if necessary - removed from the model. New sub-factors have also been added to the model over time.

Behaviour of systematic strategies

The differences described above indicate that systematic strategies have different characteristics, which can be seen in their performance behaviour. For example, the following chart shows that the annual gross excess return (alpha, y-axis) of ZKB's global equity strategy, which has now existed for 20 years, is not correlated at all with the annual equity market performance (MSCI World ex Switzerland, x-axis). The correlation is 0.0. At the same time, the alpha (y-axis) correlates negatively with the annual performance of the global bond index (Bloomberg Global Aggregate Bond Index, x-axis) with -0.1.

Alpha (gross) of the global, systematic equity strategy compared to the absolute market performance of equities and bonds (source: Zürcher Kantonalbank)

Thanks to these characteristics, the systematic strategy enriches the multi-asset portfolio:

  • There is no clear correlation in the dark blue cloud of dots. The strategy therefore performs independently of the market environment on the equity markets.
  • The same picture emerges when comparing the alpha of the systematic strategy with the alphas of selected fundamental strategies. However, this does not mean that one strategy is necessarily better than the other in the long term. On the contrary, it is possible that both approaches deliver alpha in the long term.
  • The negative correlation of alpha with the bond markets helps to improve the risk-return profile of a multi-asset portfolio.
  • In years with negative bond or equity market performance, alpha was generally positive (2nd quadrant).
  • In years with negative alpha, the performance of bonds and equity markets was generally positive (4th quadrant).

In a multi-asset portfolio, it is therefore worth considering systematic equity strategies, as they can reduce maximum drawdowns from the overall portfolio and thus also its volatility. This ultimately leads to the portfolio becoming more robust and diversified across various alpha sources.


Investment Strategy