RT Journal Article
SR Electronic
T1 The Role of Factors in Asset Allocation
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 58
OP 64
DO 10.3905/jpm.2021.1.223
VO 47
IS 5
A1 Mark Kritzman
YR 2021
UL https://pm-research.com/content/47/5/58.abstract
AB For many decades, asset classes have been the main building blocks for constructing portfolios, and, appropriately, they still are. However, in recent years investors increasingly have considered factors as an alternative to asset classes. In some cases, the motivation to substitute factors for asset classes is misguided, but factors can serve a valuable role in portfolio composition. The author discusses how investors should consider factors when constructing portfolios and, in doing so, exposes their misuse as well as their proper role in asset allocation.TOPICS: Factor-based models, portfolio construction, performance measurementKey Findings▪ Investors should allocate to asset classes instead of factors for strategic asset allocation.▪ Investors should allocate to factors to improve performance.▪ Investors can have it both ways by allocating to asset classes, but in a way that tilts toward preferred factor exposures.