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Japan’s pension fund considers factor indices

30 June 2014

The world’s largest pension scheme asked MSCI to study potential implications of these indices in its portfolio

Read more: Japan MSCI factor-based indices

MSCI has completed a research mandate on factor-based indices for the world’s biggest pension fund, Japan’s €1.24trn Government Pension Investment Fund (GPIF).

The fund intends to introduce a factor allocation in addition to its active and passive mandates.

MSCI’s research involved looking at how factor-based indices are used in large institutional portfolios and how the strategy fits alongside traditional passive and active approaches.

The study found that passive factor strategies, which are made possible through newly developed factor indices, and active management "are not mutually exclusive", said Baer Pettit, managing director and global head of MSCI’s index business.

"As a result, sophisticated institutional investors may increasingly make an independent allocation to passive factor investments, in parallel to their existing active and passive mandates."

 Chin Ping Chia, head of index-applied research for MSCI in Asia Pacific, added: "As factor-based investing becomes more common among institutional investors, there is a growing need to understand how it can be best integrated into the existing investment process.

"In this research we studied the historical performance of investable factor indexes and observed that passive factor strategies can be implemented as a potential 'third bucket’ alongside the traditional active and passive allocations."

In its research MSCI created a series of factor indices designed for large-scale asset owners and managers. These indices reweighted all the constituents of a market cap index based on six systematic factors, being value, low size, low volatility, high yield, quality and momentum. MSCI also analysed various multi-factor indexes to show the different historical performance characteristics of different combinations.

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