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Article

Integrating Factors in Market Indexes and Active Portfolios

Dimitris Melas, Zoltán Nagy, Navneet Kumar and Peter Zangari
The Journal of Portfolio Management September 2019, jpm.2019.1.096; DOI: https://doi.org/10.3905/jpm.2019.1.096
Dimitris Melas
is a managing director at MSCI, Inc. in London, United Kingdom
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Zoltán Nagy
is an executive director at MSCI, Inc. in Budapest, Hungary
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Navneet Kumar
is a vice president at MSCI, Inc. in Mumbai, India
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Peter Zangari
is a managing director and global head of research and product development at MSCI, Inc. in New York, NY
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Abstract

In this article, the authors review factor performance in global equity markets using coherent data and methodology and apply a new template to evaluate their backtests for potential selection bias under multiple testing. They then propose a systematic process for integrating factor information into different investment strategies. The authors show that this process is consistent with the Black–Litterman framework and test it on a sample of market indexes and active equity portfolios. Integrating factors in indexes improved risk-adjusted performance while retaining high liquidity and capacity. Adding factors to active strategies enhanced information ratios while maintaining the portfolio characteristics and stock selection alpha of the original strategies. The authors’ analysis may have important implications for different types of investors. Asset owners may be able to tilt reference indexes toward rewarded factors without sacrificing market coverage and diversification. Index managers can track factor-tilted indexes because they remain investable and replicable. Finally, active managers may be able to incorporate factor information into their strategies to harvest factor premiums while preserving their core investment process and the added value from fundamental security selection.

TOPICS: Factor-based models, portfolio management/multi-asset allocation, style investing

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The Journal of Portfolio Management: 47 (3)
The Journal of Portfolio Management
Vol. 47, Issue 3
February 2021
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Integrating Factors in Market Indexes and Active Portfolios
Dimitris Melas, Zoltán Nagy, Navneet Kumar, Peter Zangari
The Journal of Portfolio Management Jul 2019, jpm.2019.1.096; DOI: 10.3905/jpm.2019.1.096

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Integrating Factors in Market Indexes and Active Portfolios
Dimitris Melas, Zoltán Nagy, Navneet Kumar, Peter Zangari
The Journal of Portfolio Management Jul 2019, jpm.2019.1.096; DOI: 10.3905/jpm.2019.1.096
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  • Article
    • Abstract
    • INTEGRATING FACTORS IN MARKET INDEXES
    • INTEGRATING FACTORS IN DISCRETIONARY STRATEGIES
    • INTEGRATING FACTORS IN DISCRETIONARY STRATEGIES: A PRACTICAL EXAMPLE
    • CONCLUSION
    • ADDITIONAL READING
    • APPENDIX
    • REFERENCES
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