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Factors vs. Sectors in Asset Allocation: Stronger Together?

21 Pages Posted: 10 May 2017 Last revised: 9 Sep 2017

Marie Briere

Amundi Asset Management; Paris Dauphine University; Université Libre de Bruxelles

Ariane Szafarz

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi

Date Written: Sept 9, 2017

Abstract

This paper compares and contrasts factor investing and sector investing, and then seeks a compromise by optimally exploiting the advantages of both styles. Our results show that sector investing is effective for reducing risk through diversification while factor investing is better for capturing risk premia and so pushing up returns. This suggests that there is room for potentially fruitful combinations of the two styles. Presumably, by combining factors and sectors, investors would benefit both from the diversification potential of the former and the risk premia of the latter. The tests reveal that composite strategies are particularly attractive; they confirm that sector investing helps reduce risks during crisis periods, while factor investing can boost returns during quiet times.

Keywords: investment, asset allocation, factor, industry, sector, crisis

JEL Classification: G11, G01, C58, D92

Suggested Citation

Briere, Marie and Szafarz, Ariane, Factors vs. Sectors in Asset Allocation: Stronger Together? (Sept 9, 2017). Available at SSRN: https://ssrn.com/abstract=2965346 or http://dx.doi.org/10.2139/ssrn.2965346

Marie Briere (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

Paris Dauphine University ( email )

place du Maréchal de Lattre de Tassigny
Paris, 75016
France

Université Libre de Bruxelles ( email )

Brussels
Belgium

Ariane Szafarz

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi ( email )

50 Avenue Roosevelt
Brussels 1050
Belgium

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