@article {Simonianjpm.2019.1.108, author = {Joseph Simonian}, title = {Policy Portfolios and Portfolio Characteristics}, elocation-id = {jpm.2019.1.108}, year = {2019}, doi = {10.3905/jpm.2019.1.108}, publisher = {Institutional Investor Journals Umbrella}, abstract = {In this article, the author provides an alternative to traditional portfolio re-balancing based on changes in asset market values, one informed by equity characteristics. The logic of policy portfolio re-balancing is applied to a framework that uses assets{\textquoteright} 12-month rolling average characteristic values and return volatilities as inputs and re-balances toward those assets that exhibit relatively high characteristic-value-to-volatility ratios. Three important practical constraints are applied to the author{\textquoteright}s re-balanced portfolios. The first two constraints relate to asset weights and limit the degree to which a re-balanced portfolio{\textquoteright}s individual asset class positions and portfolio-level asset allocation can deviate from a fixed-weight reference policy portfolio. The third constraint is that any re-balanced portfolio is required to have a volatility approximately equal to the representative fixed-weight policy portfolio. The author shows that the longer-term, full-sample performance, both risk and return, of even tightly constrained characteristic-driven policy portfolios is superior to the standard procedure of re-balancing to fixed weights. These results are further validated by measuring the performance of characteristic-driven policy portfolios over rolling sub-samples of the original dataset. In the final section of the article, a meta-optimization technique is introduced that allows investors to select one characteristic-driven policy portfolio among several as the best compromise asset allocation that comes closest to maximally satisfying each of their respective objectives. TOPICS: Portfolio theory, portfolio construction, equity portfolio managementKey Findings{\textbullet} Policy portfolios based on re-balancing toward assets that exhibit relatively high characteristic-value-to-volatility ratios are shown to produce better performance relative to standard policy portfolios that re-balance towards fixed policy portfolio weights.{\textbullet} Characteristic-driven policy portfolios exhibit superior performance compared to standard policy portfolios even when the characteristic-driven policy portfolios are highly constrained with respect to their individual asset class positions, portfolio-level asset allocations and volatility profiles.{\textbullet} By means of a simple meta-optimization technique, it is possible to select one characteristic-driven policy portfolio among several as the one that comes closest to maximally satisfying each of their respective objectives.}, issn = {0095-4918}, URL = {https://jpm.pm-research.com/content/early/2019/09/12/jpm.2019.1.108}, eprint = {https://jpm.pm-research.com/content/early/2019/09/12/jpm.2019.1.108.full.pdf}, journal = {The Journal of Portfolio Management} }