Factor-Investing and Asset Allocation Strategies: A Comparison of Factor Versus Sector Optimization

Journal of Asset Management, forthcoming

41 Pages Posted: 1 Apr 2021 Last revised: 10 May 2021

See all articles by Wolfgang Bessler

Wolfgang Bessler

University of Hamburg

Georgi Taushanov

University of Giessen

Dominik Wolff

Deka Investment GmbH; Technical University of Darmstadt; Frankfurt University of Applied Sciences

Date Written: March 15, 2021


Given the tremendous growth of factor allocation strategies in active and passive fund management, we investigate whether either asset allocation strategies based on factors or sectors provide investors with a superior portfolio performance. Our focus is on comparing factor versus sector allocation as some recent empirical evidence indicates the dominance of sector over country portfolios. We analyze the performance and performance differences of sector and factor portfolios for various weighting and portfolio optimization approaches including ‘equal-weighting’ (1/N), ‘risk-parity’ (RP), minimum-variance (MinVar), mean-variance (MV), Bayes-Stein (BS) and Black-Litterman (BL) by employing a sample-based approach in which the sample moments are the input parameters for the allocation model. For the period from May 2007 to November 2020, our results clearly reveal that, over longer investment horizons, factor portfolios provide relative superior performances. For shorter periods, however, we observe time varying and alternating performance dominances as the relative advantage of one over the other strategy depends on the economic cycle. We find that during “normal” times factor portfolios clearly dominate sector portfolios, whereas during crisis periods sector portfolios are superior offering better diversification opportunities.

Keywords: Asset Allocation, Portfolio Optimization, Factor-investing, Factor vs. Sector Allocation

JEL Classification: G17, G11, C53

Suggested Citation

Bessler, Wolfgang and Taushanov, Georgi and Wolff, Dominik and Wolff, Dominik, Factor-Investing and Asset Allocation Strategies: A Comparison of Factor Versus Sector Optimization (March 15, 2021). Journal of Asset Management, forthcoming, Available at SSRN: https://ssrn.com/abstract=3805855 or http://dx.doi.org/10.2139/ssrn.3805855

Wolfgang Bessler (Contact Author)

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146

Georgi Taushanov

University of Giessen ( email )

Betriebswirtschaftslehre VII
Giessen, 35394

Dominik Wolff

Technical University of Darmstadt

Hochschulstraße 1
S1|02 40
Darmstadt, Hessen D-64289

Deka Investment GmbH ( email )

Mainzer Landstrasse 16
Frankfurt am Main, 60325

Frankfurt University of Applied Sciences ( email )

Nibelungenplatz 1
Frankfurt / Main, 60318

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