Academic Research Insight: Factors and the Road to Retirement

/Academic Research Insight: Factors and the Road to Retirement

Academic Research Insight: Factors and the Road to Retirement

By | 2017-08-18T17:11:01+00:00 June 12th, 2017|Basilico|0 Comments
  • Title: A WEALTH MANAGEMENT PERSPECTIVE ON FACTOR PREMIA AND THE VALUE OF DOWNSIDE PROTECTION
  • Authors:        LOUIS SCOTT AND STEFANO CAVAGLIA
  • Publication: THE JOURNAL OF PORTFOLIO MANAGEMENT, SPRING 2017  (version here)

What are the research questions?

The article links two current hot topics: goal based investing and factor premia.

  1. Can factor premia (value, size, momentum and quality) help the aspiring retiree achieve the goal of accumulating enough to meet his retirement spending needs?

What are the Academic Insights?

By using the circular block bootstrap ( Politis and Romano (1992)), the authors study the impact of six different strategies to the terminal wealth of the retiree: the core portfolio, the core portfolio plus an overlay in one risk premium at a time and the core portfolio with an overlay of an equally weighted allocation to each factor premia. They find that positive sentiment (defined as the BULLISH percentage) on stocks is associated with positive returns

  1.  YES- Factor premia (except for size) can enhance the distribution of terminal wealth compared to the core portfolio of global equities. The authors simulate two robustness checks where they hypothesize lower future mean returns of factor premia and skill based market timing of the global equity manager. Results of the factor premia enhancement properties seem to hold up.

The authors simulate two robustness checks where they hypothesize lower future mean returns of factor premia and skill based market timing of the global equity manager. Results of the factor premia enhancement properties seem to hold up.

Finally, the authors analyze the drawdown properties of the stand-alone core portfolio and those of the overlays. They find that a strategy which overlays an equal weighted portfolio of factor premia on top of the global equity portfolio is superior in terms of drawdown protection.

Why does it matter?

This paper confirms the importance for investors to be exposed to certain factor premia (value, size, momentum, quality). In fact, it shows that an equal allocation to these four premia on top of a global equity portfolio: 1) enhances the probability to reach retirement goals, 2) mitigates drawdowns in the journey to retirement.

The Most Important Chart from the Paper:


Elisabetta Basilico, Ph.D., CFA, (@ebasilico) is an independent investment consultant. With co-author Tommi Johnsen, PhD, she is writing an upcoming book on research backed  investing. You can learn more at http://academicinsightsoninvesting.com/

 


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About the Author:

Elisabetta Basilico, PhD, CFA
Dr. Elisabetta Basilico is a seasoned investment professional with an expertise in "turning academic insights into investment strategies." Research is her life's work and by combing her scientific grounding in quantitative investment management with a pragmatic approach to business challenges, she’s helped several institutional investor achieve stable returns from their global wealth portfolios. Her experise spans from asset allocation to active quantitative investment strategies. Holder of the Charter Financial Analyst since 2007 and a PhD from the University of St. Gallen in Switzerland, she has experience in teaching and research at various international universities and co-author of articles published in peer-reviewed journals. She and co-author Tommi Johnsen are currently writing a book on research backed investment ideas. You can find additional information at Academic Insights on Investing.

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