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A Global Factor Approach to Asset Allocation


For those that read my paper, “A Quant Approach to TAA“, I examined the use of a single factor (momentum) in constructing a global portfolio. There are a whole host of other factors, and Harindra de Silva right down the road at Analytic Investors has a great article titled, “Modern Tactical Asset Allocation“. If you can’t access that site here is a shorter free version.

Harindra de Silva outlines 3 sources of exposure that investors can use to increase their performance.

1. Systematic Market Risks – Normal world betas such as stock market risk, credit risk, interest rate risk, emerging markets, and commodities.

2. Individual Security Factors – The French-Fama factors: momentum, size (market cap), and price/earnings.

3. Global Market Factors – Focuses on the relative returns across countries, within a particular asset class.

AI goes on to further categorize the global market factors below:

Equity Markets – Earnings yield and momentum.

Fixed Income Markets – Term structure (10Yr gov – 1Month euro rate), and real interest rates (10Yr gov – inflation).

Currency Markets – Interest rate differential relative to the US Dollar.

An interesting study would be to look at a basket of global equity indices. Then rank those indices on two measures, 12Month return, and Earnings Yield, and take the highest scoring X-holdings (or form a long-short portfolio).

If anyone has seen a study with those two factors, let me know. . .

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