RT Journal Article
SR Electronic
T1 Bridging the Gap: <em>Adding Factors to Passive and Active Allocations</em>
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 17
OP 31
DO 10.3905/jpm.2018.44.4.017
VO 44
IS 4
A1 Anil Rao
A1 Raman Aylur Subramanian
A1 Dimitris Melas
YR 2018
UL https://pm-research.com/content/44/4/17.abstract
AB The authors examine how a factor allocation can be integrated into an asset owner’s existing roster of active managers. Using a risk-budgeting framework, they have several findings. (1) Asset owners who wish to maintain their existing roster of active managers and incorporate factor views may consider a top-down factor implementation, funded entirely from the core passive allocation. This approach distributed most of the active risk to active managers. (2) Asset owners who wish to preserve their existing roster of active managers and incorporate high-conviction factor views may consider an allocation between active management and a bottom-up factor implementation. This approach more evenly distributed the risk budget to active management and factors and partially funded the factor allocation from active management. (3) Asset owners who pursue a barbell strategy between core passive allocations and concentrated active managers could implement a low-volatility factor allocation, which may lower the total risk of the equity program, releasing active risk budget that can be deployed to active managers.TOPICS: Analysis of individual factors/risk premia, manager selection