Abstract
This chapter 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.
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Notes
- 1.
The way individual stocks are grouped into industrial sectors raises specific issues (Vermorken et al. 2010).
- 2.
Brière and Szafarz (2017) examine intermediate situations such as the 130/30 and the case where only the market index can be shorted.
- 3.
- 4.
In Brière and Szafarz (2015), we consider crises and bear periods separately.
- 5.
In fact, t-tests fail to detect any significant differences among means, while some differences in variances are statistically significant.
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Acknowledgments
The authors thank Vafa Ahmadi, Alexander Attié, Narayan Bulusu, Eric Bouyé, Jacob Bjorheim, Tony Bulger, Joachim Coche, Melchior Dechelette, Pierre Collin-Dufresne, Arnaud Faller, Pascal Farahmand, Tom Fearnley, Nicolas Fragneau, Campbell Harvey, Antti Ilmanen, Jianjian Jin, Theo Kaitis, Yvan Lengwiler, Christian Lopez, Gabriel Petre, Bruce Phelps, Sudhir Rajkumar, Alejandro Reveiz, Francisco Rivadeneyra, Mihail Velikov, and the participants of the Sixth Joint BIS, World Bank, Bank of Canada Public Investors Conference.
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Brière, M., Szafarz, A. (2018). Factors and Sectors in Asset Allocation: Stronger Together?. In: Bulusu, N., Coche, J., Reveiz, A., Rivadeneyra, F., Sahakyan, V., Yanou, G. (eds) Advances in the Practice of Public Investment Management. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-90245-6_11
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DOI: https://doi.org/10.1007/978-3-319-90245-6_11
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