@article {Simonian52, author = {Joseph Simonian}, title = {Policy Portfolios and Portfolio Characteristics}, volume = {46}, number = {1}, pages = {52--59}, 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 rebalancing based on changes in asset market values, one informed by equity characteristics. The logic of policy portfolio rebalancing is applied to a framework that uses assets{\textquoteright} 12-month rolling average characteristic values and return volatilities as inputs and rebalances toward those assets that exhibit relatively high characteristic-value-to-volatility ratios. Three important practical constraints are applied to the author{\textquoteright}s rebalanced portfolios. The first two constraints relate to asset weights and limit the degree to which a rebalanced 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 rebalanced 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 rebalancing 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 rebalancing toward assets that exhibit relatively high characteristic-value-to-volatility ratios are shown to produce better performance relative to standard policy portfolios that rebalance 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/46/1/52}, eprint = {https://jpm.pm-research.com/content/46/1/52.full.pdf}, journal = {The Journal of Portfolio Management} }