Prudently Combining Factors In A Portfolio

Discussion of the Stock portion of the Permanent Portfolio

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Smith1776
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Prudently Combining Factors In A Portfolio

Post by Smith1776 » Fri Oct 16, 2020 12:39 pm

Brief post on a niche topic here.

I have often remarked on the forum that separate exposure to factors such as momentum and value in a portfolio can be self-defeating. Pure value funds tend to load negatively on momentum, and pure momentum funds tend to load negatively on value. A value fund is often buying a stock when the momentum fund is selling it. This is inefficient as you are creating unnecessary transactions and reducing the net factor exposure within your portfolio. At least that's how the theory goes.

This interesting piece by Jack Vogle from Alpha Architect demonstrates that the "inefficient" method of having separate value and momentum sleeves can actually produce better results. Perhaps by keeping momentum and value separate one can achieve deeper exposure to both factors and that can outweigh any alleged inefficiencies.

https://alphaarchitect.com/2015/03/26/t ... art2valmom
Combining factors in a portfolio: https://alphaarchitect.com/2015/03/26/the-best-way-to-combine-value-and-momentum-investing-strategies/
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