Time-Varying Factor Allocation

The Journal of Portfolio Management (forthcoming)

Posted: 20 Sep 2021 Last revised: 11 Dec 2023

See all articles by Stefan Vincenz

Stefan Vincenz

Vienna University of Economics and Business; ZZ Vermögensverwaltung GmbH

Tom Oskar Karl Zeissler

Vienna University of Economics and Business

Date Written: September 15, 2021

Abstract

This study provides evidence on whether predictive information can help to profitably allocate a cross-asset factor portfolio, covering well-known factors over the asset classes equity, commodities, fixed income, and foreign exchange. The authors investigate the performance of a meaningful set of predictors, which they broadly divide into macro and market indicators. Their analysis indicates that tilting a global factor portfolio based on inflation and business-cycle signals can enhance performance, whereas most of the analyzed predictors do not notably improve decision making or are even counterproductive. The results are validated over an extensive out-of-sample period and under practical considerations, while surviving conservative transaction cost assumptions. In sum, the authors advise exercising skepticism when assessing outperformance based on return forecasting, given the challenges of selecting and adhering to the right variables beforehand. Nevertheless, their results suggest potential benefits of conditioning an investor's factor allocation on fundamental macroeconomic information and motivates future research to explore this link.

© [2024] PMR. All rights reserved.

Keywords: factor investing, factor allocation, factor timing, factor tilting, multi-asset, return predictability, market indicators, macroeconomic indicators, asset management

JEL Classification: G11, D81

Suggested Citation

Vincenz, Stefan and Zeissler, Tom Oskar Karl, Time-Varying Factor Allocation (September 15, 2021). The Journal of Portfolio Management (forthcoming), Available at SSRN: https://ssrn.com/abstract=3924346 or http://dx.doi.org/10.2139/ssrn.3924346

Stefan Vincenz

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

ZZ Vermögensverwaltung GmbH ( email )

Tom Oskar Karl Zeissler (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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