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Factor investing and asset allocation strategies: a comparison of factor versus sector optimization

Author

Listed:
  • Wolfgang Bessler

    (University of Hamburg)

  • Georgi Taushanov

    (Gothaer Asset Management GmbH)

  • Dominik Wolff

    (Technical University Darmstadt and Deka Investment GmbH)

Abstract

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. Our focus is on comparing factor versus sector allocations as some recent empirical evidence indicates the dominance of sector over country portfolios. 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. We employ a sample-based approach in which the sample moments are the input parameters for the allocation model. For the period from May 2007 to November 2020, our results clearly reveal that, over longer investment horizons, factor portfolios provide relative superior performances. 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. 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.

Suggested Citation

  • Wolfgang Bessler & Georgi Taushanov & Dominik Wolff, 2021. "Factor investing and asset allocation strategies: a comparison of factor versus sector optimization," Journal of Asset Management, Palgrave Macmillan, vol. 22(6), pages 488-506, October.
    • Handle: RePEc:pal:assmgt:v:22:y:2021:i:6:d:10.1057_s41260-021-00225-1
    DOI: 10.1057/s41260-021-00225-1
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    2. Rehman, Mobeen Ur & Vo, Xuan Vinh & McIver, Ron & Kang, Sang Hoon, 2022. "Sensitivity of US sectoral returns to energy commodities under different investment horizons and market conditions," Energy Economics, Elsevier, vol. 108(C).
    3. Bessler, Wolfgang & Vendrasco, Marco, 2022. "Short-selling restrictions and financial stability in Europe: Evidence from the Covid-19 crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).

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    More about this item

    Keywords

    Asset allocation; Portfolio optimization; Factor investing; Factor versus sector allocation;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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