Certain investor types, particularly those approaching or in retirement, care about the income properties of investment portfolios. This article addresses the income characteristics of equities and bonds and provides a framework for building multi-asset portfolios with varying degrees of income orientation, both ex post, investigating the historical income behavior of equities and bonds, as well as through a forward-looking lens, based on today’s much lower dividend and bond yields. Because bond yields and prices are inversely related, bonds imbed a natural time-diversification property across the two dimensions that income-oriented investors care most about: portfolio income and expected wealth. Despite the long-term growth potential of equity income and the prospect for higher bond yields over the next several years, we still find that a meaningful allocation to bonds is likely optimal for investors with an orientation toward organic portfolio income.
{"title":"Asset Allocation for Retirement Income: A Framework for Income-Oriented Investors","authors":"Steven G. Sapra, S. Klein, Rene Martel","doi":"10.3905/jpm.2023.1.458","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.458","url":null,"abstract":"Certain investor types, particularly those approaching or in retirement, care about the income properties of investment portfolios. This article addresses the income characteristics of equities and bonds and provides a framework for building multi-asset portfolios with varying degrees of income orientation, both ex post, investigating the historical income behavior of equities and bonds, as well as through a forward-looking lens, based on today’s much lower dividend and bond yields. Because bond yields and prices are inversely related, bonds imbed a natural time-diversification property across the two dimensions that income-oriented investors care most about: portfolio income and expected wealth. Despite the long-term growth potential of equity income and the prospect for higher bond yields over the next several years, we still find that a meaningful allocation to bonds is likely optimal for investors with an orientation toward organic portfolio income.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"127 - 141"},"PeriodicalIF":1.4,"publicationDate":"2023-01-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43445610","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Asset allocation should rely on a sound theoretical foundation that is empirically valid and robust in practice. Intertemporal CAPM (ICAPM) portfolio theory resembles the hedging/return-seeking portfolios approach sometimes used in practice, but with a sound theoretical foundation, empirical support, and attractive features for functional implementation. ICAPM portfolio theory largely resolves key issues with modern portfolio theory and standard CAPM portfolio theory, while providing a unified framework for liability-relative, goals-based, and asset-only asset allocation. The author documents the application of ICAPM portfolio theory to practice, addressing key implementation and technical issues related to the liability hedge, risky-asset portfolio optimization and constraints, portfolio selection and Monte Carlo simulation, and extensions to goals-based and asset-only asset allocation.
{"title":"An ICAPM Framework for Asset Allocation","authors":"Peter Mladina","doi":"10.3905/jpm.2023.1.457","DOIUrl":"https://doi.org/10.3905/jpm.2023.1.457","url":null,"abstract":"Asset allocation should rely on a sound theoretical foundation that is empirically valid and robust in practice. Intertemporal CAPM (ICAPM) portfolio theory resembles the hedging/return-seeking portfolios approach sometimes used in practice, but with a sound theoretical foundation, empirical support, and attractive features for functional implementation. ICAPM portfolio theory largely resolves key issues with modern portfolio theory and standard CAPM portfolio theory, while providing a unified framework for liability-relative, goals-based, and asset-only asset allocation. The author documents the application of ICAPM portfolio theory to practice, addressing key implementation and technical issues related to the liability hedge, risky-asset portfolio optimization and constraints, portfolio selection and Monte Carlo simulation, and extensions to goals-based and asset-only asset allocation.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"155 - 167"},"PeriodicalIF":1.4,"publicationDate":"2023-01-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46558417","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2022-12-31DOI: 10.3905/jpm.2022.49.2.162
Olga Lepigina, Kevin J. DiCiurcio, Ian Kresnak
Relative performance of value with respect to growth has been a subject of industry debate for many years and is a cornerstone of numerous equity allocation decisions. This article presents a framework for quantifying the extent of over or undervaluation of value relative to growth and for identifying the key factors driving performance. The authors construct a fair value measure of the value factor to growth factor price-to-book ratio using prior-period ratio of price/book, 10-year trailing inflation, 10-year real Treasury yield, equity volatility, and growth of corporate profits in a vector error-correction model (VECM). This is then extended to a robust forecasting model for future value and growth returns. Upon conducting an out-of-sample value versus growth historical return forecast, the authors conclude that this method is a significant improvement over the use of historical average as a future return estimation. This methodology offers an alternative robust solution to forecasting value versus growth returns that can be further applied to asset allocation decisions and risk management.
{"title":"A Fair Value Approach to Forecasting Value versus Growth Returns","authors":"Olga Lepigina, Kevin J. DiCiurcio, Ian Kresnak","doi":"10.3905/jpm.2022.49.2.162","DOIUrl":"https://doi.org/10.3905/jpm.2022.49.2.162","url":null,"abstract":"Relative performance of value with respect to growth has been a subject of industry debate for many years and is a cornerstone of numerous equity allocation decisions. This article presents a framework for quantifying the extent of over or undervaluation of value relative to growth and for identifying the key factors driving performance. The authors construct a fair value measure of the value factor to growth factor price-to-book ratio using prior-period ratio of price/book, 10-year trailing inflation, 10-year real Treasury yield, equity volatility, and growth of corporate profits in a vector error-correction model (VECM). This is then extended to a robust forecasting model for future value and growth returns. Upon conducting an out-of-sample value versus growth historical return forecast, the authors conclude that this method is a significant improvement over the use of historical average as a future return estimation. This methodology offers an alternative robust solution to forecasting value versus growth returns that can be further applied to asset allocation decisions and risk management.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"162 - 174"},"PeriodicalIF":1.4,"publicationDate":"2022-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45949363","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2022-12-31DOI: 10.3905/jpm.2022.49.2.001
Frank J. Fabozzi
{"title":"Editor’s Introduction for 2023 Special Issue on Factor Investing","authors":"Frank J. Fabozzi","doi":"10.3905/jpm.2022.49.2.001","DOIUrl":"https://doi.org/10.3905/jpm.2022.49.2.001","url":null,"abstract":"","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"1 - 3"},"PeriodicalIF":1.4,"publicationDate":"2022-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42728070","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Market conditions change over the course of the business cycle. When are investors compensated to take risk? And what type of risk? This article proposes a practical regime-based framework for tactical asset allocation (TAA), combining leading economic indicators and global risk appetite to identify four macro regimes: recovery, expansion, slowdown, and contraction. The authors document distinct performance characteristics across regimes for traditional asset classes and their underlying risk factors, focusing on the term premium, credit premium, and equity premium. They provide simple and practical examples of TAA strategies for long-only multi-asset and fixed-income portfolios with the potential to generate attractive excess returns. Results are statistically significant and economically relevant after transaction costs, with information ratios between 0.70 and 0.80.
{"title":"Tactical Asset Allocation, Risk Premia, and the Business Cycle: A Macro Regime Approach","authors":"Alessio de Longis, Dianne Ellis","doi":"10.3905/jpm.2022.1.456","DOIUrl":"https://doi.org/10.3905/jpm.2022.1.456","url":null,"abstract":"Market conditions change over the course of the business cycle. When are investors compensated to take risk? And what type of risk? This article proposes a practical regime-based framework for tactical asset allocation (TAA), combining leading economic indicators and global risk appetite to identify four macro regimes: recovery, expansion, slowdown, and contraction. The authors document distinct performance characteristics across regimes for traditional asset classes and their underlying risk factors, focusing on the term premium, credit premium, and equity premium. They provide simple and practical examples of TAA strategies for long-only multi-asset and fixed-income portfolios with the potential to generate attractive excess returns. Results are statistically significant and economically relevant after transaction costs, with information ratios between 0.70 and 0.80.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"103 - 126"},"PeriodicalIF":1.4,"publicationDate":"2022-12-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45403448","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Several hidden risks of factor investing can lead to investor disappointment; even diversified baskets of factors are prone to sharp drawdowns and prolonged periods of underperformance. Accordingly, the authors explore a variety of techniques to improve the risk-adjusted returns of individual factors and factor portfolios. Introducing a new two-step volatility management method that adjusts the length of the estimation window to scale factor returns, the authors find that this technique is effective in improving both risk-adjusted returns and the trade-off between performance improvement and turnover characteristics. Ultimately, coupling this novel two-step approach with an optimization technique that captures both volatility and correlation information leads to improved risk-adjusted performance, lower volatility of volatility, and improved kurtosis and drawdown characteristics.
{"title":"Mitigating the Hidden Risks of Factor Investing","authors":"R. Arnott, Vitali Kalesnik, Lillian J. Wu","doi":"10.3905/jpm.2022.1.454","DOIUrl":"https://doi.org/10.3905/jpm.2022.1.454","url":null,"abstract":"Several hidden risks of factor investing can lead to investor disappointment; even diversified baskets of factors are prone to sharp drawdowns and prolonged periods of underperformance. Accordingly, the authors explore a variety of techniques to improve the risk-adjusted returns of individual factors and factor portfolios. Introducing a new two-step volatility management method that adjusts the length of the estimation window to scale factor returns, the authors find that this technique is effective in improving both risk-adjusted returns and the trade-off between performance improvement and turnover characteristics. Ultimately, coupling this novel two-step approach with an optimization technique that captures both volatility and correlation information leads to improved risk-adjusted performance, lower volatility of volatility, and improved kurtosis and drawdown characteristics.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"111 - 124"},"PeriodicalIF":1.4,"publicationDate":"2022-12-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47909854","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Thinking small is the last thing institutional investors should be doing right now. A fundamentally new investment model, best described as the Prudent Society Model, is emerging to cope with the changes, risks, and opportunities resulting from the sustainability transition. Institutional investors who are the first to succeed in getting this model right will flourish. The model integrates three insights: focusing on short-term disruption for long-term success, developing tools to successfully exploit new instruments and unlock new markets because of climate change, and deepening the ownership of investments. The authors suggest that boards need to learn, adapt, and experiment to implement this model.
{"title":"Putting the Long Term to Work: Shaping the Prudent Society Investment Model","authors":"K. Koedijk, Alfred Slager","doi":"10.3905/jpm.2022.1.451","DOIUrl":"https://doi.org/10.3905/jpm.2022.1.451","url":null,"abstract":"Thinking small is the last thing institutional investors should be doing right now. A fundamentally new investment model, best described as the Prudent Society Model, is emerging to cope with the changes, risks, and opportunities resulting from the sustainability transition. Institutional investors who are the first to succeed in getting this model right will flourish. The model integrates three insights: focusing on short-term disruption for long-term success, developing tools to successfully exploit new instruments and unlock new markets because of climate change, and deepening the ownership of investments. The authors suggest that boards need to learn, adapt, and experiment to implement this model.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"97 - 105"},"PeriodicalIF":1.4,"publicationDate":"2022-12-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44092470","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Michele Aghassi, Clifford S. Asness, Charles Fattouche, T. Moskowitz
Factor investing has been around for several decades, backed by an enormous body of literature, and yet it is still surrounded by much confusion and debate. Some of the rhetoric and myths have existed for a long time, while others have arisen in response to the difficult performance from 2018 to 2020 and the subsequent turnaround. This article examines many claims about factor investing; some are timeless, while others are focused on specific concerns that have emerged recently. The authors reference an extensive academic literature and perform simple, yet powerful, analysis to address these claims.
{"title":"Fact, Fiction, and Factor Investing","authors":"Michele Aghassi, Clifford S. Asness, Charles Fattouche, T. Moskowitz","doi":"10.3905/jpm.2022.1.453","DOIUrl":"https://doi.org/10.3905/jpm.2022.1.453","url":null,"abstract":"Factor investing has been around for several decades, backed by an enormous body of literature, and yet it is still surrounded by much confusion and debate. Some of the rhetoric and myths have existed for a long time, while others have arisen in response to the difficult performance from 2018 to 2020 and the subsequent turnaround. This article examines many claims about factor investing; some are timeless, while others are focused on specific concerns that have emerged recently. The authors reference an extensive academic literature and perform simple, yet powerful, analysis to address these claims.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"57 - 94"},"PeriodicalIF":1.4,"publicationDate":"2022-12-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46836987","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Volatility as a measure of investment risk is widely accepted by academic researchers and industry professionals and has become ubiquitous in investment analysis. Furthermore, it is among the few financial variables that exhibit predictable time variation. Hence, there is an extensive amount of literature describing volatility models and assessing their forecasting power. This article provides a discussion of the prominent models and compares them in a unified notation framework. The empirical analysis shows that it is hard to outperform even simple trailing variance–type models. Autoregressive conditional heteroskedasticity (ARCH), generalized ARCH (GARCH), implied volatility, asymmetric, and seasonal models hardly improve forecasts despite added complexity. In this study, only momentum-based and intraday data–based models improved predictive accuracy significantly.
{"title":"Forecasting Stock Market Volatility","authors":"Michael Stamos","doi":"10.3905/jpm.2022.1.452","DOIUrl":"https://doi.org/10.3905/jpm.2022.1.452","url":null,"abstract":"Volatility as a measure of investment risk is widely accepted by academic researchers and industry professionals and has become ubiquitous in investment analysis. Furthermore, it is among the few financial variables that exhibit predictable time variation. Hence, there is an extensive amount of literature describing volatility models and assessing their forecasting power. This article provides a discussion of the prominent models and compares them in a unified notation framework. The empirical analysis shows that it is hard to outperform even simple trailing variance–type models. Autoregressive conditional heteroskedasticity (ARCH), generalized ARCH (GARCH), implied volatility, asymmetric, and seasonal models hardly improve forecasts despite added complexity. In this study, only momentum-based and intraday data–based models improved predictive accuracy significantly.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"129 - 137"},"PeriodicalIF":1.4,"publicationDate":"2022-12-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41415401","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Over the past decade, the asset management industry witnessed a significant migration of capital from active investment strategies into passive investment strategies. Undoubtedly, the structural change is shaking the active management–dominated mutual fund industry to its core. A closer scrutiny of active management suggests that the performance of active managers is mainly a function of both stock selection and portfolio construction. As other studies have already provided evidence of successful stock selection strategies via factor premiums, the author focuses on examining the impact of portfolio construction on portfolio performance. The author finds that active managers’ failure to incorporate risk during portfolio construction overwhelms the expected return signal from stock selection.
{"title":"The Death of Active Management Has Been Greatly Exaggerated","authors":"Edwards Aw","doi":"10.3905/jpm.2022.1.449","DOIUrl":"https://doi.org/10.3905/jpm.2022.1.449","url":null,"abstract":"Over the past decade, the asset management industry witnessed a significant migration of capital from active investment strategies into passive investment strategies. Undoubtedly, the structural change is shaking the active management–dominated mutual fund industry to its core. A closer scrutiny of active management suggests that the performance of active managers is mainly a function of both stock selection and portfolio construction. As other studies have already provided evidence of successful stock selection strategies via factor premiums, the author focuses on examining the impact of portfolio construction on portfolio performance. The author finds that active managers’ failure to incorporate risk during portfolio construction overwhelms the expected return signal from stock selection.","PeriodicalId":53670,"journal":{"name":"Journal of Portfolio Management","volume":"49 1","pages":"62 - 71"},"PeriodicalIF":1.4,"publicationDate":"2022-12-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48546387","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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