We compare sector and factor allocations rather than comparing country and factor allocations as Bessler et al. As assets, we employ factor and sector indices, which are investable at low cost via exchange-traded funds (ETFs). In this study, we analyze different asset allocation models and compare their portfolio performance. Subsequently, factor allocation strategies experienced a rising popularity among portfolio managers (Amenc et al. This research suggested that the asset allocation strategies should shift from the classical diversification across sectors or countries toward a factor-based approach. Consequently, asset management should employ factors not only to measure fund performance but also to construct portfolios. The analysis suggested that systematic risk factors could explain a substantial part of the returns of actively managed funds. The inroad of factors as asset classes into asset management, however, occurred through a government-mandated report for the Norwegian government pension fund conducted by Ang et al. Other often-employed factors are “dividends” (Fama and French 1988, 1993), “liquidity” (Pástor and Stambaugh 2003), “betting-against-beta” (Frazzini and Pedersen 2014) and “quality-minus-junk” (Asness, et al. Carhart ( 1997) extended this to a four-factor model by including a momentum factor, and Fama and French ( 2015, 2018) added two additional factors to their own model resulting in a five-factor model or six-factor model when adding the momentum factor. This offered researchers and investors the opportunity to better differentiate between the various sources of risk and risk premium in capital markets. Fama and French ( 1993) extended and shifted the multifactor analysis toward characteristic factors, dividing the systematic risk spectrum initially into three core components. ![]() ![]() (1986) introduced a multifactor model employing pre-specified macroeconomic variables. Following a decade of research in arbitrage pricing theories (APT), Chen et al. ![]() We extent the earlier research of Briere and Szafarz ( 2021) by focusing on investable factor and sector indices and by analyzing a variety of different out-of-sample investment strategies.Įxtending the single-factor Capital Asset Pricing Model (Sharpe 1964) to multifactor models has a long tradition. Moreover, we are interested in the question whether factor timing adds value and examine whether dynamic factor investment strategies outperform a static multifactor benchmark. The main objective of this research is to investigate whether factor-based portfolios perform superiorly relative to sector-based portfolios. The idea of factor investing is to diversify a portfolio among the underlying characteristic risk factors, introduced in the literature for explaining stock returns. However, more recently factor investing emerged as a popular new approach. ![]() One important insight is that during “normal” times factor portfolios clearly dominate sector portfolios, whereas during crisis periods sector portfolios are superior offering better diversification opportunities.įor many decades, favored asset allocation strategies focused on country or sector portfolios. For shorter periods, however, we observe time-varying and alternating performance dominances as the relative advantage of one over the other strategy depends on the economic cycle. For the period from May 2007 to November 2020, our results clearly reveal that, over longer investment horizons, factor portfolios provide relative superior performances. We employ a sample-based approach in which the sample moments are the input parameters for the allocation model. We analyze the performance and performance differences of sector and factor portfolios for various weighting and portfolio optimization approaches, including “equal-weighting” (1/N), “risk parity,” minimum-variance, mean-variance, Bayes–Stein and Black–Litterman. Our focus is on comparing factor versus sector allocations as some recent empirical evidence indicates the dominance of sector over country portfolios. Given the tremendous growth of factor allocation strategies in active and passive fund management, we investigate whether factor or sector asset allocation strategies provide investors with a superior performance.
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