Using Factor Analysis to Build Better Portfolios
Highlights
- Macroeconomic, style and thematic factors can be thought of as categories of investment exposures that are expected to provide both return and volatility over time.
- Macroeconomic factors include economic growth, interest rates, or foreign currency, while equity style factors include size, value, growth or quality.
- But thematic factors are growing increasingly important in building more resilient portfolios, particularly in the wake of the Covid shutdown and reopening.
- Identifying the factor exposures in portfolios with multiple funds can help uncover unintentional asset category weights.
- This can be particularly important for model portfolios invested in global equity, multisector fixed income or global asset allocation products.
- Evaluating factor allocations can help explain past performance and identify products that may pair well in the future.
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