RESEARCH: PORTFOLIO CONSTRUCTION

EQUITY FACTORS: REDUCING PORTFOLIO TURNOVER

  • Portfolio turnover of equity factors can be reduced significantly by trading more conservatively
  • However, reducing turnover does not necessarily increase risk-return ratios
  • It all depends on transaction costs

FACTORS: SHORTING STOCKS VS THE INDEX 

  • Most factor investing research is based on long-short stock portfolios
  • Investible risk premia strategies often feature a short index position
  • Trade-off between theoretical alpha and implementation costs & efficiency

FACTOR PORTFOLIOS: TURNOVER ANALYSIS

  • Factor portfolios have an annual turnover over more than 100%
  • The turnover rate varies substantially across factors
  • Decreasing the rebalancing frequency reduces turnover, but also risk-return ratios

FACTOR CONSTRUCTION: PORTFOLIO REBALANCING

  • Factor portfolios do not benefit significantly from intra-month rebalancing
  • However, too infrequent rebalancing leads to lower risk-return ratios
  • The robustness of factor performance at different rebalancing periods is one of the advantages of factor investing

FACTOR CONSTRUCTION: PORTFOLIO SCENARIOS

  • Most researchers create factor portfolios by taking the top & bottom 30% of stocks, which results in large portfolios
  • Portfolios can be reduced, but firm risks start influencing factor returns with too few stocks
  • Most investors are likely better of buying factor products then building factor portfolios themselves

FACTOR RETURNS: SMALL VS LARGE CAPS

  • A frequent criticism of factor investing is that factor returns are stronger in small caps
  • Our research highlights that this is not uniformly true across factors
  • Value and Size benefit most from including small caps

FACTOR CONSTRUCTION: BETA VS $-NEUTRALITY 

  • Factors constructed $-neutral didn’t benefit much from beta-exposure from 2000 to 2017
  • Beta-neutrality is only a must for Low Volatility
  • However, beta-neutral factors offer lower correlation to long-only indices

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