A significant proportion of global institutional investors are unaware of risk-factor cross exposure when applying tilts in equity portfolios, a survey has shown.

The concept arises from applying risk-factor tilts in both active and passive equity portfolios, which has become increasingly common in recent years.

Some of the tilt strategies are referred to as smart beta or alternative index strategies.

A survey of 139 global investors by Northern Trust Asset Management (NTAM) found a slight majority (51%) use factor tilt strategies within their listed equity portfolios.

Of the most common, a value tilt was used by just over one-third of those who use tilts, with quality, size and momentum each used by 16.9% of investors.

However, despite the fact over-exposure to certain factors was a top concern regarding the use of risk-factor tilts, only 18% of respondents was ‘very certain’ of the total risk factor exposure in the entire listed equity portfolio.

Just over 50% was ‘moderately certain’, while the remaining 31% was either ‘fairly uncertain’ or entirely unaware of cross exposure.

Further analysis on three pension funds – one each from the UK, Europe and the US – Northern Trust found that investors’ use of varying tilt strategies negated any positive tilts through contradicting methods.

As a result, those using a wide range of active and passive equity strategies in the portfolio ended up with a neutral factor exposure, despite intended tilts to one or more factors, the US asset manager said.

“The portfolios do not always reflect the investors’ goals and objectives,” NTAM said.

John Krieg, managing director of institutional distribution at Northern Trust, said the ability to understand cross exposure was imperative in multi-factor tilt circumstances.

“The fact fewer than one in five respondents felt certain of their factor exposures shows the difficulty of monitoring a large, complex institutional portfolio,” he added.

On analysing three pension funds’ equity portfolios and discovering a neutral factor tilt, despite intended exposures, Krieg said: “In general, taking an experimental approach to factor-based investing does not produce the desired results.

“Investors have a greater likelihood of success if they make a substantial commitment to these strategies.”