PT  - JOURNAL ARTICLE
AU  - Tzee-Man Chow
AU  - Feifei Li
AU  - Yoseop Shim
TI  - Smart Beta Multifactor Construction Methodology: <em>Mixing versus Integrating</em>
AID  - 10.3905/jii.2018.8.4.047
DP  - 2018 Feb 28
TA  - The Journal of Index Investing
PG  - 47--60
VI  - 8
IP  - 4
4099  - https://pm-research.com/content/8/4/47.short
4100  - https://pm-research.com/content/8/4/47.full
AB  - The authors compare the qualitative properties and the risk and return profiles of simulated multifactor portfolios constructed in accordance with two different methodologies. The first, the integrating approach, is a process that searches the universe for securities that have exposures to various target factors and selects the ones with the highest composite scores. The second, the mixing approach, achieves the desired exposure to multiple factors by allocating assets across single-factor portfolios. The authors tested portfolios designed to capture value, momentum, profitability, investment, and low-beta factor premiums. Integrating outperformed mixing absolutely and on a risk-adjusted basis. The integrating strategy, however, proved to have higher concentration and turnover, resulting in idiosyncratic active risk and estimated transaction costs that reduced its return advantage over the mixing strategy. In addition, the mixing approach offers the practical benefits of transparency, flexibility, and ease of performance attribution. These features make mixing a viable choice, especially for investors and practitioners in a principal/agent relationship.TOPICS: Factor-based models, portfolio construction