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Factor investing and asset allocation strategies: a comparison of factor versus sector optimization

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  • Bessler, Wolfgang
  • Taushanov, Georgi
  • Wolff, Dominik

Abstract

Given the tremendous growth of factor allocation strategies in active and passive fund management, we investigate whether factor or sector asset allocation strategies provide investors with a superior performance. Our focus is on comparing factor versus sector allocations 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,” minimum-variance, mean-variance, Bayes–Stein and Black–Litterman. We employ 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. One important insight is that during “normal” times factor portfolios clearly dominate sector portfolios, whereas during crisis periods sector portfolios are superior offering better diversification opportunities.

Suggested Citation

  • Bessler, Wolfgang & Taushanov, Georgi & Wolff, Dominik, 2024. "Factor investing and asset allocation strategies: a comparison of factor versus sector optimization," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 149873, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    • Handle: RePEc:dar:wpaper:149873
    DOI: 10.1057/s41260-021-00225-1
    Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/149873/
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