Factor-Based Portfolio Analysis

Analyzing and Optimizing Factor Exposures

Listed below are some of the top whitepapers on factor-based portfolio analysis and the management, or optimization, of factor exposures. (We wrote about a similar topic back in October.)  For instance, an analysis of performance attribution could show what portion of portfolio performance is attributable to certain factors as opposed to security selection.

But what steps could be taken by multifactor portfolio managers when factor exposures are in conflict with one another? BNP Paribas Asset Management discusses factor targeting, and several other papers examine factor tilts, unintended exposures, and the composition of returns within equity and fixed income portfolios.  

EM Equities: Crash testing the Fama-French factor model (Robeco, 2018)

The authors embrace alternative factor definitions that may help to improve upon the application of the Fama-French five factor model to emerging market equities.

Crowded Trades Don’t Explain Managers’ Recent Pain (Axioma, Dec 2018)

Axioma examines the speculative proposition that recent poor hedge fund returns are due to the unwinding of certain overcrowded risk-factor positions.

Buffett's Alpha (Financial Analysts Journal, 2018)

Are Warren Buffett’s extraordinary investment returns more attributable to skill or luck? This study breaks down why Berkshire Hathaway has significantly outperformed the stock market and concludes that Buffett’s success appears not to be luck but it largely explained by his focus on low-volatility, high-quality, and cheap stocks, amplified by uniquely cheap access to leverage.

A Multi-Factor Strategy for Index Enhancement (QMA, Dec 2018)

This study proposes a multi-factor approach to outperforming an index by removing both 'lottery' stocks and 'safety' stocks.

Alternative approaches to multi-factor index construction (FTSE Russell, 2018)

FTSE Russell shows that a bottom-up approach to multi-factor index construction that is based upon multiple tilting provides advantages to a top-down approach based upon selection and weighting.

Factor investing: get your exposures right! (BNP Paribas AM, 2018)

This paper is devoted to the question of optimal portfolio construction for equity factor investing. It shows how to validate that an equity portfolio has certain targeted factor exposures, before imposing any constraints.

Pure and Simple: Measuring the Purity of Smart Beta Strategies (HSBC GAM, 2018)

For compliance reasons, this paper is only accessible in the United Kingdom

Many common factor indices exhibit unintended exposures to unrelated factors because of the simplistic way in which they were constructed. This paper discusses how to eliminate these unwanted risks in factor portfolios.

Factor Indexes and Factor Exposure Matching (FTSE Russell, 2018)

In this 36-page paper, the authors construct several factor tilt portfolios that differ in terms of construction and weight but have precisely matched factor exposures. They then examine the implications of factor exposure on performance.

Factor-based challenges (LGIM, Sep 2018)

For compliance reasons, this paper is NOT accessible in the United States and Canada

LGIM reviews two case studies on factor implementation involving issues with unintended exposures.

Global active bond fund returns: a factor decomposition (Vanguard, Jul 2018)

This Vanguard research paper looks at 15 types of global active bond funds in order to decipher the portion of their results that can be explained by credit, term, currency, high yield, security selection, and market timing.