{"id":47065,"date":"2016-08-15T12:40:41","date_gmt":"2016-08-15T16:40:41","guid":{"rendered":"https:\/\/www.bloomberg.com\/professional\/insights\/trading\/optimize-portfolio-make-factor-bet\/"},"modified":"2025-12-03T11:22:21","modified_gmt":"2025-12-03T16:22:21","slug":"optimize-portfolio-make-factor-bet","status":"publish","type":[3762],"link":"https:\/\/www.bloomberg.com\/professional\/insights\/trading\/optimize-portfolio-make-factor-bet\/","title":{"rendered":"Optimize your portfolio to make a factor bet"},"content":{"rendered":"<div  class=\"bbg-row-container\">\n    <style>section[data-anchor=row-6a0aff432a3e7]::before {\n\t\t\t\tbackground-color: #eeeeee;\n\t\t\t}<\/style>\n    <section class=\"bbg-row bg--custom-color  bg--eeeeee text--black bbg-row--full-bg-bleed\" data-anchor='row-6a0aff432a3e7'>\n        \n        \n        <div\n            class=\"bbg-row--content\"\n                    >\n            \n            <p><div\n    class=\"bbg-column bbg-column--width-2\"\n    style=\"\"\n    >\n    \n<\/div><div\n    class=\"bbg-column bbg-column--width-8 bbg-column--valign-bottom\"\n    style=\"\"\n    >\n    <p>    <ul class=\"bbg-categories_list\">\n                    <li>\n                <a href=\"https:\/\/www.bloomberg.com\/professional\/insights\/category\/financial-services\/\" rel=\"category tag\">\n                    Financial Services\n                <\/a>\n            <\/li>\n                    <li>\n                <a href=\"https:\/\/www.bloomberg.com\/professional\/insights\/category\/trading\/\" rel=\"category tag\">\n                    Trading\n                <\/a>\n            <\/li>\n            <\/ul>\n<div\n    class=\"bbg-spacer\"\n        style=\"height: 24px !important\"\n    >\n<\/div>    <h1 class=\"bbg-metadata bbg-metadata--title\">Optimize your portfolio to make a factor bet<\/h1>\n<\/p>\n\n<\/div>\n\n\n                    <\/div>\n    <\/section>\n<\/div>\n\n<div  class=\"bbg-row-container\">\n    <section class=\"bbg-row  text--black row-padding--top-compact row-padding--bottom-none bbg-row--full-bg-bleed\" data-anchor='row-6a0aff4331d07'>\n        \n        \n        <div\n            class=\"bbg-row--content\"\n                    >\n            \n            <p><div\n    class=\"bbg-column bbg-column--width-2\"\n    style=\"\"\n    >\n    \n<\/div><div\n    class=\"bbg-column bbg-column--width-8\"\n    style=\"\"\n    >\n    <p><div\n    class=\"bbg-spacer\"\n        style=\"height: 40px !important\"\n    >\n<\/div>    <p class=\"bbg-metadata bbg-metadata--date\">August 15, 2016<\/p>\n<\/p>\n\n<\/div>\n\n\n                    <\/div>\n    <\/section>\n<\/div>\n\n<div  class=\"bbg-row-container\">\n    <section class=\"bbg-row  text--black row-padding--top-none row-padding--bottom-none bbg-row--full-bg-bleed\" data-anchor='row-6a0aff43345a1'>\n        \n        \n        <div\n            class=\"bbg-row--content\"\n                    >\n            \n            <p><div\n    class=\"bbg-column bbg-column--width-2\"\n    style=\"\"\n    >\n    \n<\/div><div\n    class=\"bbg-column bbg-column--width-8\"\n    style=\"\"\n    >\n    <p><div\n\tclass=\"bb-wysiwyg\"\n\t\t>\n\t<p><em>This article was written by Bloomberg Market Specialist Sean Markowicz\u00a0for Markets Magazine. It appeared first on the Bloomberg Terminal.<\/em><\/p>\n<p>\u201cIt seems that now everyone wants to time factors,\u201d Cliff Asness, founder of AQR Capital Markets, wrote on his\u00a0website\u00a0in April.<\/p>\n<p>Factors are common characteristics that can explain risk and return in assets. Stocks in the same industry, for example, tend to move together.<\/p>\n<p>Likewise, stocks of companies that pay a high dividend usually rise and fall as a group. Hence, dividend yield\u2014like momentum and value\u2014is considered a style factor.<\/p>\n\n<\/div>\n<div id=\"\" class=\"wpb_content_element bbg-single-image align-center\">\n    <figure class=\"bbg-single-image__figure\" style=\"max-width:100%\">\n                <img loading=\"lazy\" decoding=\"async\" width=\"1528\" height=\"1095\" src=\"https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor1.jpg\" class=\"bbg-single-image__image attachment-full\" alt=\"\" title=\"\" srcset=\"https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor1.jpg 1528w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor1.jpg 552w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor1.jpg 768w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor1.jpg 800w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor1.jpg 120w\" sizes=\"auto, (max-width: 1528px) 100vw, 1528px\" \/>\n        \n            <\/figure>\n<\/div>\n\n<\/div>\n\n\n                    <\/div>\n    <\/section>\n<\/div>\n\n<div  class=\"bbg-row-container\">\n    <section class=\"bbg-row  text--black row-padding--top-none bbg-row--full-bg-bleed\" data-anchor='row-6a0aff433d37a'>\n        \n        \n        <div\n            class=\"bbg-row--content\"\n                    >\n            \n            <p><div\n    class=\"bbg-column bbg-column--width-2\"\n    style=\"\"\n    >\n    \n<\/div><div\n    class=\"bbg-column bbg-column--width-8\"\n    style=\"\"\n    >\n    <p><div\n\tclass=\"bb-wysiwyg\"\n\t\t>\n\t<p>Strategies that aim to buy factor exposure low and sell high likely owe their popularity to several developments. Smart-beta\u00a0exchange-traded funds\u00a0and other funds have made it easy to bet on a specific factor, such as low volatility or momentum. In addition, certain factors clearly outperform in given periods. The $1.3 billion iShares Edge MSCI USA Momentum Index\u00a0Fund\u2014an ETF that tracks stocks whose prices have been rising\u2014returned 9 percent last year. By comparison, the S&amp;P 500 gained only 1.4 percent. In other words, momentum beat the U.S. market by almost 8 percentage points in 2015.<\/p>\n<p>Certain factors have patterns that reflect risk preferences during different stages of a business cycle. When the economy turns down, quality and low volatility are usually the best-performing style factors. When growth picks up, momentum and value strategies typically perform well. You can potentially tap such patterns to tilt your portfolio toward the factors that you expect will perform best.<\/p>\n<p><strong>To dig into<\/strong>\u00a0the\u00a0factor exposures\u00a0of your holdings, you can use the factor models in the Bloomberg Portfolio &amp; Risk Analytics system. <a href=\"https:\/\/www.bloomberg.com\/professional\/products\/bloomberg-terminal\/portfolio-analytics\/\">The PORT optimizer then lets you analyze potential trades<\/a> that you could make to adjust your exposures.<\/p>\n<p>Let\u2019s walk through an example using an ETF that tracks the MSCI World Index as a sample portfolio. (A bit of evidence of smart beta\u2019s popularity: The global market fund, with $276 million in assets, is about one-fifth the size of its sister ETF that tracks momentum.)<\/p>\n<p>In the PORT function, the table at the bottom of the screen lets you see the six factors that contribute the most to the performance of your portfolio. In the case of the MSCI World ETF, the biggest contributor was its U.S. market exposure in late May.<\/p>\n<p>You can also view cumulative factor returns for a period you choose.<\/p>\n\n<\/div>\n<div id=\"\" class=\"wpb_content_element bbg-single-image align-center\">\n    <figure class=\"bbg-single-image__figure\" style=\"max-width:100%\">\n                <img loading=\"lazy\" decoding=\"async\" width=\"1632\" height=\"1254\" src=\"https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor2.jpg\" class=\"bbg-single-image__image attachment-full\" alt=\"\" title=\"\" srcset=\"https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor2.jpg 1632w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor2.jpg 552w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor2.jpg 768w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor2.jpg 800w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor2.jpg 120w\" sizes=\"auto, (max-width: 1632px) 100vw, 1632px\" \/>\n        \n            <\/figure>\n<\/div>\n\n<div\n\tclass=\"bb-wysiwyg\"\n\t\t>\n\t<p>The returns of factors in the Bloomberg model track theoretical long-short market-neutral portfolios with unit exposure to a given factor and zero to all others. Through late May, momentum was the worst performer of the 10 style factors in Bloomberg\u2019s global risk model this year, with a return of -2.2 percent. The best performer was dividend yield, which gained 1.6 percent.<\/p>\n<p>PORT provides details about which industries are most exposed to various style factors. In the case of the ETF, the industry with highest profitability factor weighting as of the end of last year was information technology.<\/p>\n<p><strong>Let\u2019s say you<\/strong>\u00a0want to make a bet on profitability.<\/p>\n<p>First, create a portfolio with $10 million in cash and then select the iShares MSCI World ETF.<\/p>\n<p>The trade simulation featurefirst lets you set goals for your optimization.<\/p>\n<p>Suppose you expect profitable stocks to outperform and momentum names to continue to underperform. Your optimization goals then would be to maximize exposure to the first factor and minimize exposure to the second. You\u2019d set the first goal to maximize GL Profit\u2014the global profit factor. The second you\u2019d set to minimize GL Momentum.<\/p>\n\n<\/div>\n<div id=\"\" class=\"wpb_content_element bbg-single-image align-center\">\n    <figure class=\"bbg-single-image__figure\" style=\"max-width:100%\">\n                <img loading=\"lazy\" decoding=\"async\" width=\"1702\" height=\"1318\" src=\"https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor3.jpg\" class=\"bbg-single-image__image attachment-full\" alt=\"\" title=\"\" srcset=\"https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor3.jpg 1702w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor3.jpg 552w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor3.jpg 768w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor3.jpg 800w, https:\/\/assets.bbhub.io\/image\/v1\/resize?width=auto&amp;type=webp&amp;url=https:\/\/assets.bbhub.io\/professional\/sites\/10\/imported\/professional\/sites\/4\/go_factor3.jpg 120w\" sizes=\"auto, (max-width: 1702px) 100vw, 1702px\" \/>\n        \n            <\/figure>\n<\/div>\n\n<div\n\tclass=\"bb-wysiwyg\"\n\t\t>\n\t<p>Once you set the constituent stocks of the ETF benchmark as your universe you can specify constraints for your optimization. Finally you can set conditions such as a maximum weight for any given stock.<\/p>\n<p>In a backtest run in May, the optimized portfolio would have generated a year-to-date return of 3.08 percent, vs. -0.07 percent for the benchmark. That equates to an outperformance of 3.14 percent when global markets were volatile. Most important, we can see that exposure to all style factors contributed 2.61 percent to that active return. Specifically, the profit factor weighting contributed 2.17 percent, while underweighting momentum generated 1.08 percent.<\/p>\n<p>This backtest highlights the value that multifactor investing can add to a portfolio\u2019s return. Factor strategies can improve traditional active portfolio management by helping you to isolate themes that persist across various market environments. Just as investors make tactical decisions to invest in certain countries or sectors, factor strategies can be used to express a market view. Such strategies can also offer a way to improve the consistency of returns, lower risk, and increase diversification.<\/p>\n<p>The challenge, of course, is to correctly predict which factors will perform well.<\/p>\n<p><em>Markowicz is a PORT advanced specialist in the analytics department at Bloomberg in London.<\/em><\/p>\n<p><em>Bloomberg Terminal subscribers can learn more about how to use <a href=\"https:\/\/bloom.bg\/1HlgNFF\">PORT &lt;GO&gt;<\/a> by accessing the <a href=\"https:\/\/bloom.bg\/2bbd98t\">PORT HELP page<\/a> which includes useful whitepapers.<\/em><\/p>\n<p><em>If you are not a subscriber, you can <a href=\"https:\/\/www.bloomberg.com\/professional\/request-demo\/?bbgsum=DG-WS-CORE-csc\">request a demo<\/a>.<\/em><\/p>\n\n<\/div>\n\n<\/div>\n\n\n                    <\/div>\n    <\/section>\n<\/div>\n\n<div  class=\"bbg-row-container\">\n    <style>section[data-anchor=row-6a0aff4345b55]::before {\n\t\t\t\tbackground-color: #eeeeee;\n\t\t\t}<\/style>\n    <section 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