Equity factors for multi-asset class portfolios: a strategic asset allocation perspective

Stefano Cavaglia (), Louis Scott (), Kenneth Blay () and Tarun Gupta ()
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Stefano Cavaglia: State of Wisconsin Investment Board
Louis Scott: Alphidence Capital
Kenneth Blay: Global Thought Leadership at Invesco
Tarun Gupta: Managing Director of Research and Global Head of Investment Technology

Journal of Asset Management, 2022, vol. 23, issue 2, No 2, 100-113

Abstract: Abstract This paper highlights the long run, strategic benefits of factor premia as a complement (overlay) to an underlying exposure to equities and bonds. We provide a utility-based framework for evaluating alternative strategies and in particular account for the impact of extreme and undesirable events to long run wealth accumulation. We present evidence suggesting that an overlay of equity premia to a reference portfolio can enhance the likelihood of achieving wealth accumulation goals and can smooth the transition path to achieving those goals. These results can be attributed to both long positions and short positions in contrast to recent findings suggesting shorts fail to add value. The benefits of the factor premia overlay additionally extend to the decumulation or retirement stage as reflected in an enhancement to the coverage ratio. Taken together, these findings suggest that the equity factor premia strategies we present can be utilized to support welfare enhancing gains.

Keywords: Strategic asset allocation; Equity factor premia (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1057/s41260-022-00262-4

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