PT  - JOURNAL ARTICLE
AU  - Joe Staines
AU  - Steven (Yegang) Wu
AU  - Wei (Victor) Li
AU  - Yazann Romahi
TI  - Stacking Blocks or Mixing Paints? <em>Modular and Integrated Approaches to Factor Portfolio Construction</em>
AID  - 10.3905/jii.2018.8.4.085
DP  - 2018 Feb 28
TA  - The Journal of Index Investing
PG  - 85--92
VI  - 8
IP  - 4
4099  - https://pm-research.com/content/8/4/85.short
4100  - https://pm-research.com/content/8/4/85.full
AB  - Multifactor portfolios can be built in two distinct ways. The first is to construct portfolios that capture a single factor in isolation, adding these together to build a modular portfolio of factor building blocks. The second is to consider all factors holistically and build an integrated portfolio, like mixing paints. Both can deliver the diversification benefit and efficiency saving of multifactor investment, but ultimately investors, portfolio managers, and index designers must choose one over the other. In this article, we outline the impact of choosing modular or integrated portfolio construction in a variety of contexts. We highlight the factors that might indicate the use of modular over integrated construction, or vice versa. We provide evidence based on both stylized theoretical portfolio construction and back testing using real data.TOPICS: Portfolio construction, factor-based models