Factor Investing: Get Your Exposures Right!
François Soupé (BNP Paribas Asset Management), et al.
October 26, 2018
This paper is devoted to the question of optimal portfolio construction for equity factor investing. The first part of the paper focusses on how to make sure that a given equity portfolio has the targeted factor exposures, even before imposing any constraints. We show that such portfolios can be derived from mean-variance optimization using stock expected returns as inputs provided these are built in a robust way from information about the factors. We propose a framework to build those robust stock expected returns and show that the targeted factor exposures are retained by the portfolios both before and after applying realistic constraints, e.g. long-only. Other more simplistic approaches fail. In the second part of the paper we illustrate the application of the framework to a practical case where the objectives are, first, to decide about the risk budget allocation to factors in some pragmatic way; and second, to construct a long-only constrained portfolio that retains the targeted exposures to four factors from well-known asset pricing equity models, namely High-minus-Low (HML), Robust-minus-Weak (RMW), Conservative-minus-Aggressive (CMA) and Momentum (MOM).
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Trade-war risk is top priority at G20 meeting: BBC
Russia-Trump link becomes clear after Michael Cohen’s guilty plea: Bloomberg
Trump cancels meeting with Putin, citing Ukraine confrontation: CNN
PMI shows China’s mfg sector continues to weaken in Nov: Bloomberg
Falling oil prices are putting pressure on junk bond market: NY Times
Fed minutes: policymakers expect a rate hike in December: MW
Pending home sales in US tumbled to four-year low in October: MW
US consumer spending rose sharply in Oct as inflation eased: Bloomberg
Survey: women more pessimistic on US economy compared with men: Axios
US jobless claims rose to 6-month high last week: CNBC

Despite a turbulent run for the US stock market over the past two months, the growth factor’s edge is intact by a solid margin relative to value, based on a set of ETFs. Although year-to-date equity returns generally have been trimmed recently, the growth-value divide remains stark, with the former still posting a healthy gain in 2018 while the latter has deteriorated to a slight loss.
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Senate votes to punish Saudis for Khashoggi death: LA Times
Ukraine minister: Russia blocking Ukrainian Azov Sea ports: Reuters
Democrats nominate Pelosi as Speaker of the House: NY Times
Brazil backs out of hosting next year’s UN climate summit: The Hill
Morgan Stanley’s chief US economist: Trump can’t fire Fed chair: CNBC
US life expectancy fell in 2017: Bloomberg
Fed Chair Powell calls for gradual rate hikes: MNI
New US home sales fell to 2-1/2 yr low in Oct: CNBC
US trade deficit widened in October: MW
Fed’s 5th district mfg activity grew at moderate pace in Nov: Richmond Fed
Revised GDP data: US economy expanded at 3.5% in Q3: MW

University of Michigan professor Scott Page reminds us that more is better for using models in the art/science of forecasting. Writing in the Harvard Business Review, he advises that “with an ensemble of models, you can make up for the gaps in any one of the models.”
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Russia says it will deploy new missiles to Crimea as Ukraine tensions rise: Reuters
Kudlow: US and China have re-engaged in trade talks ahead of G20 meeting: CNBC
Trump may cancel meeting with Putin at G20 after Russia-Ukraine clash: The Hill
Trump threatens to end GM’s electric car subsidies over factory closures: CNN
US gov’t shutdown risk rising over battle to fund border wall: Politico
Federal Housing Finance Agency: US house prices rose slowly in Q3: Housing Wire
US Consumer Confidence Index eased in Oct, but remains elevated: MW
US home price gains decelerate to slowest pace since Jan 2017: CNBC

Economic activity for the US appears headed for a second quarterly slowdown in the final three months of this year. The projection is based on a set of nowcasts compiled by The Capital Spectator. The current median estimate: a 2.7% increase in real growth (seasonally adjusted annual rate), which is slightly below the previous outlook published in early November.
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Will Russia-Ukraine fight over sea passage trigger wider war? NY Times
US-China trade deal prospects dim after Trump’s comments: CNN
Early signs suggest China’s economy slowed for 6th month in Nov: Bloomberg
Trump dismisses climate-based econ warning in his administration’s report: BBC
Trump: UK-EU Brexit agreement could threaten US-UK trade deal: CNBC
House GOP rolls out huge tax bill for lame-duck Congress: Politico
GM announces hefty worker cuts and plant closures: CNN
Strong job market lifts Chicago Fed Nat’l Activity Index in Nov: MW

US investment-grade bonds were the exception, courtesy of a flat performance. Otherwise, the rest of the major asset classes fell last week during a wave of selling, based on a set of exchange-traded products.
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Russia seizes Ukraine naval ships off Crimean Peninsula: BBC
Russia reopens Kerch Strait to shipping after seizing Ukrainian naval ships: Reuters
EU approves UK’s Brexit deal: BBC
US shuts major crossing with Mexico as migrants rush border: WaPo
Global markets rebound on Monday: MW
Businesses consider Democratic proposals to raise corporate tax rate: The Hill
Eurozone growth slips to four-year low in Nov, according to PMI data: IHS Markit
US Composite PMI signals points to moderate growth in November: IHS Markit
US Treasury inflation forecast via 5yr Notes tumbled to 1.77%–lowest this year: