Research Financial Analysts Journal | A Publication of CFA Institute

Constructing Long-Only
Multifactor Strategies:
Portfolio Blending vs.
Signal Blending
Khalid Ghayur, CFA, Ronan Heaney, and Stephen Platt, CFA
Khalid (Kal) Ghayur, CFA, is head of ActiveBeta Equity Strategies at Goldman Sachs Asset Management, Boulder, Colorado. Ronan Heaney is
head of research for ActiveBeta Equity Strategies at Goldman Sachs Asset Management, Boulder, Colorado. Stephen Platt, CFA, is head of
portfolio management for ActiveBeta Equity Strategies at Goldman Sachs Asset Management, Boulder, Colorado.

I
Long-only multifactor strategies
may be constructed by combin-
ing individual-factor portfolios
(portfolio blending) or by combin-
ing individual-factor signals into
a composite signal to construct
the portfolio (signal blending). To
compare these two approaches,
we present a framework for build-
ing exposure-matched portfolios.
In empirical tests on global equity
markets, we find that, generally,
portfolio blending generates higher
information ratios for low-to-
moderate levels of tracking error.
At high levels of tracking error,
signal blending delivers better
risk-adjusted performance. These
results generally hold for various
factor combinations, and they
have important practical implica-
tions for investors considering
the implementation of multifactor
smart-beta strategies.
Disclosure: The authors work at Goldman
Sachs Asset Management, which offers
strategies that use both the portfolio-
blending and signal-blending approaches
to factor investing. Additional disclosures
can be found at the end of this article.
CE Credits: 1
n recent years, investor interest in smart beta has shifted toward
multifactor diversification strategies. The increased interest has
been driven by increased understanding of the cyclicality of indi-
vidual-factor returns and factor return correlations. Individual equity
factors generally outperform the market in the long run, but they can
fall out of favor periodically and significantly underperform the market.
Factors also generally exhibit low or negative pairwise excess return
correlations, however, that offer potential diversification and risk-
reduction benefits. Factor diversification strategies, therefore, tend to
produce higher relative risk-adjusted returns—that is, information ratios
(IRs)—with lower risk of market underperformance than do strategies
using individual factors or alternatively weighted smart-beta offerings
with concentrated exposures to specific equity factors.
With the heightened interest in multifactor strategies, investor focus
has also moved toward portfolio construction. Two factor-combination
approaches have become the subject of some debate in the industry.
We refer to them as “portfolio blending” and “signal blending.”
Portfolio blending is a two-step portfolio construction process in which
individual-factor portfolios are constructed first and then combined
to create a blended portfolio. For instance, an individual value factor
portfolio and an individual momentum factor portfolio would be con-
structed and then combined to create the blended value+momentum
portfolio. The individual-factor portfolios could be combined by equal
weighting or risk weighting or through an optimization process that
determines the optimal weights.
We wish to thank the executive editor, Stephen Brown; co-editor Daniel Giamouridis; and
two anonymous reviewers at the Financial Analysts Journal for their insightful comments
and guidance. We also wish to acknowledge the valuable contributions and assistance
provided by the following colleagues at Goldman Sachs Asset Management: Andrew
Alford, Osman Ali, Armen Avanessians, Patricia Berman, Gary Chropuvka, Ingrid Hanson,
and Matthew Schwab.

70 © 2018 CFA Institute. All rights reserved. Third Quarter 2018

For Personal Use Only. Not for Distribution.

 Constructing Long-Only Multifactor Strategies
The signal-blending approach is a single-step port-
folio construction process in which the signals (i.e.,
scores or ranks) of individual factors are combined
into a composite signal. For instance, the value
factor signal and the momentum factor signal would
be combined into a value+momentum composite
signal for each security in the universe. The com-
posite signal would then be used to construct the
value+momentum portfolio.
The debate so far has focused on which approach
delivers superior investment efficiency (i.e., risk-
adjusted returns). Proponents of signal blending
argue that this approach achieves higher risk-
adjusted returns because it avoids securities with
offsetting exposures (i.e., securities that rank highly
on one factor but poorly on another factor) while
emphasizing securities with balanced positive expo-
sures to the desired factors. Proponents of portfolio
blending counter that at low levels of active risk
(tracking error), performance differences between
the two approaches are not meaningful but portfolio
blending offers the strong advantage of also meet-
ing investment objectives such as transparency in
performance attribution.
This article provides a comparison of the portfolio-
blending and signal-blending approaches in an easy-
to-understand framework. We show that long-only
multifactor portfolios with similar levels of factor
exposure, as measured by the weighted factor score,
can be constructed by using either approach.
In empirical tests of the two approaches, we consid-
ered four well-recognized equity factors—namely,
value, momentum, quality, and volatility. We con-
structed average exposure-matched portfolios by
using the portfolio-blending and signal-blending
approaches. We found that at low-to-moderate
levels of factor exposure and active risk, the portfolio
blend generally produced higher IRs. At high levels
of factor exposure and active risk, the signal blend
retained better diversification and generated higher
IRs. Thus, our findings challenge the broad conclu-
sion reached by some earlier studies that signal
blending dominates portfolio blending.
Clarke, de Silva, and Thorley (2016) discussed a
theoretical framework for assessing the mean–vari-
ance efficiency—that is, Sharpe ratio (SR)—of a
portfolio of individual securities (signal blending) and
an “optimal combination” portfolio (portfolio blending)
constructed from individual-factor portfolios. They
considered four factors in their analysis—low beta,
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small size, value, and momentum. Based on assump-
tions about expected factor IRs, correlation structure,
and secondary exposures, the authors found that
the long-only optimal-combination portfolio real-
ized about 40% of the potential SR improvement of
an unconstrained long–short optimal-combination
portfolio. In contrast, the long-only portfolio of indi-
vidual securities realized around 80% of the potential
improvement, mainly because of stronger factor
exposures. Based on long-term empirical results from
a universe of the largest 1,000 US stocks, the authors
reported that the maximum-SR portfolio of individual
securities achieved an 18% higher SR and 31% higher
IR than the optimal-combination portfolio. Clarke et
al. noted, however, that the results of their study were
specific to the assumed expected factor IRs, correla-
tion structure, and secondary exposures. The authors
focused on SR optimization because it allowed them
to solve for the optimal level of active risk, which they
found to be about 8.5% in empirical tests. This level
of active risk will likely be viewed as high, however, by
most asset owners. To our knowledge, asset owners
do not pursue such high active-risk levels, especially in
the context of diversified factor investing.
Bender and Wang (2016) used a rules-based weight-
ing methodology that scaled market-capitalization
weights by a rank multiplier. They considered four
equity factors—value, momentum, quality, and
volatility. The authors found that a bottom-up
portfolio (signal blending) produced a 20% higher
IR than a combination portfolio (portfolio blend-
ing). Surprisingly, in their analysis, the combination
portfolio showed little diversification benefit; it
provided only marginal improvement in IR over
the individual-factor portfolios. In the Bender and
Wang methodology, the equal weighting of signals
and equal weighting of factor portfolios actually
produced differences in factor exposures, which may
not be obvious. In their method, the signal blend was
created by equally weighting the factor ranks and
then multiplying the composite rank by cap weight.
The portfolio blend was created by equally weighting
the individual-factor portfolios. This methodology led
to differences in factor exposures between the two
portfolios. When market-cap weights are scaled by
a rank multiplier, however, the exposures of the two
portfolios can be easily matched by either reweight-
ing the signals (in the signal blend) or reweighting the
factor portfolios (in the portfolio blend). In fact, this
reweighting not only matches factor exposures but
also results in identical portfolios with no differences
in performance.1
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Financial Analysts Journal | A Publication of CFA Institute
Fitzgibbons, Friedman, Pomorski, and Serban (2017)
compared the performance of active risk–matched
portfolios derived from a universe similar to the
MSCI World Index from February 1993 through
December 2015. They considered value and momen-
tum factors. The authors found that at a 4% track-
ing error, the integrated portfolio (signal blending)
produced a 40% higher IR than the portfolio mix
(portfolio blending). Additionally, the benefits of
integration were shown to increase as negative cor-
relation between factors rose, the number of factors
increased, or the tracking error rose. These findings
led Fitzgibbons et al. to conclude that an integrated
portfolio outperforms a portfolio mix under almost
all conditions.
Leippold and Rϋegg (2017) challenged the general
conclusion reached by the three studies cited so
far that signal blending dominates portfolio blend-
ing. They showed that the signal-blending approach
produces better risk-adjusted returns than port-
folio blending for only a few factor combinations.
Additionally, when they conducted robust perfor-
mance tests, they found no evidence of significant
differences between the two approaches; that is, the
hypothesis that the two approaches are the same
could not be rejected. Therefore, they concluded
that the dominance of signal blending reported by
earlier studies is a “statistical fluke.”
This article seeks to add some balance to the debate
about the two approaches to building long-only
multifactor portfolios. First, because a primary
objective of factor investing is to gain efficient
exposure to the desired factors, when approaches
to building multifactor portfolios are compared, the
framework should, at a minimum, ensure that the
portfolios have roughly equivalent exposures to
the factors. In the absence of exposure matching,
differences in efficiency may simply be the result of
exposure differences. Therefore, we propose here
an intuitive, easy-to-understand framework for
constructing exposure-matched portfolios and for
understanding their composition and performance
differences.
Second, we created average exposure-matched
portfolios, at various levels of factor exposure, and
used them as the basis for a fair comparison of signal
blending and portfolio blending. We show that when
exposure-matched portfolios are constructed and
compared, the assertion that signal blending, in
general, achieves higher investment efficiency than
portfolio blending can be challenged.
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Third, we extend the existing research by reporting
empirical results for two-, three-, and four-factor
strategies and for various segments of global equity
markets, including emerging markets.
Fourth, we broaden the current debate by considering
other investment process objectives in addition to
investment efficiency. For instance, in the context of
smart-beta investing, asset owners generally consider
simplicity, transparency, and implementation flexibility
to be key objectives. In our experience, many asset
owners, therefore, implement multifactor strategies
through the portfolio-blending approach because it is
better suited to achieve these objectives.
Finally, in our opinion, the focus of the current
debate is misplaced. The existing literature makes an
attempt to reach a general conclusion about whether
portfolio blending is a superior approach to signal
blending or vice versa. We argue that such an assess-
ment is more appropriately made in the context of a
given investment process.
Constructing Exposure-Matched
Multifactor Portfolios
Some recent studies have cited an advantage of
signal blending to be the approach’s ability to achieve
stronger and more balanced exposures to the desired
factors. However, the question is, Does the signal
blend retain its investment efficiency advantage
if the compared portfolios are matched on factor
exposures? To answer this question, we constructed
exposure-matched portfolios and then compared the
investment efficiency with which the two approaches
deliver those exposures.
The basic framework we describe for using the two
approaches to construct average exposure-matched
portfolios facilitates an intuitive understanding of the
relative merits of the two approaches compared with
other techniques, such as risk model–based optimiza-
tion. Factor exposures can be measured either by
weighted z-scores (measuring standard deviations
below or above a raw mean score) or by active-risk
contribution. And either approach may be used to
construct exposure-matched portfolios. For our
comparative analysis, we preferred to use weighted
z-scores because they are direct and explicit measures
of a portfolio’s factor exposures. This approach also
facilitates creating a simple framework to generate
and compare exposure-matched portfolios. Active-risk
contribution is a less direct approach and may involve
Third Quarter 2018
 Constructing Long-Only Multifactor Strategies
considerable estimation in determining factor returns/
contributions in either a cross-sectional or time-series
regression framework. The process of using risk con-
tribution to create exposure-matched portfolios can
also be significantly more complex, especially when
multiple factors are being considered.
The process starts with an equal-weighted universe
of securities.2 Securities are assigned a z-score
(exposure) on each factor. For the signal blend,
individual scores are combined to create a composite
z-score. A portfolio is constructed by overweight-
ing and underweighting securities on the basis of a
percentile threshold (e.g., top 50% based on factor
z-scores). All securities below the threshold are
excluded (equally underweighted), whereas those
above are equally overweighted.3 Exposure to the
targeted factors is adjusted by varying the threshold.
The two examples described in the next sections
illustrate the approaches for low- and high-exposure
scenarios and highlight the potential differences in
investment efficiency. We considered two uncor-
related factors with normally distributed exposures
and assumed that factor payoffs are linearly related
to factor exposures.4
Low Factor Exposures. First, we consider a
case in which both portfolios realize an exposure
Figure 1. Signal Blending:
Example with Two Factors
Figure 2. Portfolio A. Factor 1 Porolio
Blending: Example with + +
Two Factors
Factor 2 Exposure
– –
– Factor 1 Exposure
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of approximately 0.50 for each factor. In the
signal-blending approach, this exposure is achieved
by selecting the top 50% of the securities in the
universe based on the composite score. The blue
shaded area of Figure 1 shows the securities that
this portfolio holds at equal weights. The x-axis and
the y-axis represent the exposures to, respectively,
Factor 1 and Factor 2. Because 50% of the universe
is held in the portfolio, all selected securities are held
at two times their universe weight.
In the portfolio-blending approach, the same factor
exposures are achieved by selecting the top 25%
of the universe securities for each factor portfolio.
These selected securities are also held at equal
weights. Panel A of Figure 2 shows the securities
held in the Factor 1 portfolio, and Panel B shows the
securities held in the Factor 2 portfolio. These secu-
rities are held at four times their universe weight.
The two factor portfolios are then combined in
equal proportions, and the combined portfolio holds
the securities depicted in Panel C. The securities
included in the blue area are held at two times their
universe weight, and the securities in the yellow area
are held at four times their universe weight.
In Panel A of Figure 3, we compare the signal blend
and portfolio blend portfolios by overlaying Figure 1
+
Factor 2 Exposure
–
– Factor 1 Exposure +
B. Factor 2 Porolio C. Combined Porolio
+
Factor 2 Exposure
Factor 2 Exposure
–
+ – Factor 1 Exposure + – Factor 1 Exposure +
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Financial Analysts Journal | A Publication of CFA Institute
Figure 3. Portfolio
Comparisons: Signal-
Blending and Portfolio-
Blending Examples
Factor 2 Exposure
(signal blend) and Panel C of Figure 2 (portfolio blend).
The two portfolios have a high degree of overlap
(Area 1). These shared securities are expected to
make a positive contribution to factor exposures,
active return, and active risk in both portfolios. These
contributions are also expected to be higher for the
portfolio blend because it holds securities that rank
highly on both factors at twice the weight reflected in
the signal blend (the black shaded area within Area 1).
Securities held only in the signal blend (Area 2) have
moderately net positive exposures to both factors.
These securities can be expected to make slightly
positive contributions to exposures, active return,
and active risk. Securities held only in the portfolio
blend (Area 3) have net negative factor exposures
and high negative active-return correlations because
of large offsetting factor exposures. These securities
are expected to make slightly negative contributions.
Overall, given the large degree of overlap and antici-
pated contributions to active return and active risk,
we would expect the two portfolios for low factor
exposure to have similar IRs.
High Factor Exposures. Now consider the
case in which both portfolios realize an exposure of
approximately 0.75 for each factor. In the signal-
blending approach, this result is achieved by select-
ing the top 25% of universe securities on the basis
of composite factor scores. In the portfolio-blending
approach, the same factor exposures are achieved
by selecting the top 12.5% of the universe in each
factor portfolio. A comparison of the two portfolios
is shown in Panel B of Figure 3. The overlap (Area
1) is considerably smaller than in Panel A. These
shared securities are expected to make larger factor
contributions for the portfolio blend, even though
fewer securities are held at more concentrated
weights. Securities held only in the signal blend are
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A. Low Factor Exposures B. High Factor Exposures
+ +
3 1 1
3 1 1
Factor 2 Exposure
2 1
2 1
3 3
– –
– Factor 1 Exposure + – Factor 1 Exposure +
expected to make large positive factor contributions
as the proportion of securities (and portfolio weight)
held in Area 2 increases. Securities held only in the
portfolio blend (Area 3) have a meaningful weight in
the portfolio but can be expected to have moder-
ate factor contributions. Overall, for the case of
high factor exposure, we would expect the signal
blend to achieve the desired factor exposures with
much better diversification and a higher IR than the
portfolio blend.
Because achieving higher exposures requires more
concentration, there is a direct relationship between
factor exposures and active risk. Therefore, the basic
concepts discussed here also imply that at low-to-
moderate levels of active risk, we would expect
the portfolio blend and the signal blend to perform
similarly, but at high levels of active risk, the signal
blend portfolio should exhibit better performance.
In the next section, we report our study of whether
such expectations are validated in the historical data.
Empirical Analysis
We began with an equally weighted Russell 1000
Index universe from which to make selections and
considered two factors, value and momentum.5 We
defined value as an equal combination of book value/
price and earnings/price, and we defined momen-
tum as the last 11-month total return lagged by one
month.6 These factors were chosen for our focus
because value and momentum were used in recent
studies to highlight the inability of the portfolio-
blending approach to achieve high exposures and
investment efficiency in the presence of negatively
correlated factors. The analysis period is January
1979 through June 2016.7 The hypothetical factor
portfolios were rebalanced on a monthly basis.
Third Quarter 2018
 Constructing Long-Only Multifactor Strategies

We calculated a z-score for each stock by using book
value/price and earnings/price, summed the two
scores, and recomputed the z-score to arrive at a
composite value score. We also calculated a z-score
for each stock’s momentum. For the signal blend
portfolio, the combined signal for each security was
defined as the sum of the value and momentum
z-scores.
For the low-factor-exposure case (we will discuss
the case of high factor exposure later), the top 50%
of the names as defined by the combined z-scores
were selected and equally weighted to create the
signal blend portfolio. Panel A of Table 1 shows
that the signal blend portfolio achieved an expo-
sure (weighted z-score) of 0.43 to value and 0.45 to
momentum and an average exposure for the two
factors of 0.44.
We constructed a portfolio blend to have similar
factor exposures by selecting the top 25% of the
securities in each factor portfolio on the basis of
the corresponding z-scores. The individual-factor
portfolios were then combined in equal proportions
to create the portfolio blend. Also reported in Panel
A is that the portfolio blend achieved almost identi-
cal individual and average exposures to value and
momentum.8 In addition, the two portfolios had a
similar percentage of securities held and active share.9
Panel A of Table 2 compares the portfolios’ weight
distributions. As expected, the portfolios have a large
degree of overlap. Shared securities have a total
weight of 80% in the signal blend and 86% in the
portfolio blend. Securities held exclusively in each
portfolio account for only 20% of the total weight in
the signal blend and 14% in the portfolio blend.

Table 1. Comparison of Signal Blend and Portfolio Blend Portfolios from the Russell 1000
Universe, January 1979–June 2016

Momentum Number of
Portfolio Value Exposure Exposure Securities Held Active Share

A. Low factor exposure

Signal blend 0.43 0.45 50% 50%
Portfolio blend 0.43 0.46 47% 53%

B. High factor exposure

Signal blend 0.88 0.96 15% 85%
Portfolio blend 0.87 0.98 10% 90%

Table 2. Portfolio Weight Distributions: Russell 1000 Universe, January 1979–June 2016

Total Weight Active Weight

Exclusively Exclusively
Shared Held Not Held Shared Held Not Held
Securities Securities Securities Securities Securities Securities

A. Low factor exposure

Signal blend 80% 20% 0% 40% 10% –50%
Portfolio blend 86% 14% 0% 46% 7% –53%

B. High factor exposure

Signal blend 53% 47% 0% 45% 40% –85%
Portfolio blend 80% 20% 0% 72% 18% –90%

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Financial Analysts Journal | A Publication of CFA Institute
Given the large overlap, as well as similarities in
active weights, we expected the performance of the
two portfolios relative to an equal-weighted Russell
1000 benchmark to be roughly similar. However,
the portfolio blend for low factor exposure gener-
ated a 51% higher IR (0.89 versus 0.59), as reported
in Panel A of Table 3. Following Ledoit and Wolf
(2008), we tested the statistical significance of the
difference in IRs and found the difference to be
significant at the 5% level, with a p-value of 0.016.10
Additionally, note that at low levels of factor expo-
sure, differences in active risk do not meaningfully
affect differences in IRs. For example, in this case,
the higher IR of the portfolio blend is not a result of
its lower active risk. The portfolio blend at an active
risk (4.15%) similar to that of the signal blend still
has a significantly higher IR, 0.91.
To provide more insight into this result, Panel A of
Table 4 reports the contributions to factor expo-
sures, active return, and active risk for the two
portfolios. Shared securities (Area 1 of Panel A in
Figure 3) made larger contributions in the portfolio
blend than in the signal blend because of higher
factor exposure contributions, but their investment
efficiency (i.e., contribution IR) is similar. A surpris-
ing result might be the average active return of the
securities held in only one portfolio. The securities
held exclusively in the portfolio blend (Area 3 of
Panel A in Figure 3) had an average active return of
1.20%, compared with 0.13% for the securities held
only in the signal blend (Area 2 of Panel A in Figure
3). Furthermore, these securities provided an active-
risk-reduction benefit of –0.12% in the portfolio
blend while adding 0.46% to active risk in the signal
blend. The active return and risk impact of not hold-
ing these securities conversely affected the contribu-
tions from “Not Held Securities” in both approaches.
These differences in active-return and active-risk
contribution resulted in the portfolio blend having
a higher active return and lower active risk (hence,
higher IR) than the signal blend.
The finding that securities held only in the portfolio
blend generated a positive average active return
can be largely explained by the interaction effects
between the factors. In Figure 4, we present the
annualized active returns of monthly reconstituted
quartile buckets of securities in the Russell 1000 uni-
verse (a 4 × 4 matrix) based on independent value and
momentum z-scores. When value was held constant
(i.e., for a given row), high-score momentum stocks
(Q4) performed better than low-score momentum
stocks (Q1). High-score momentum stocks performed
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Table 3. Portfolio Performance vs. the
Russell 1000, January 1979–June
2016
Active Active Information
Portfolio Return Risk Ratio
A. Low exposure
Signal blend 2.52% 4.25% 0.59
Portfolio blend 3.15% 3.55% 0.89
B. High exposure
Signal blend 4.18% 6.87% 0.61
Portfolio blend 4.47% 8.35% 0.54
especially well for low-score value stocks, with a
Q4–Q1 annualized active-return spread of 15.4%.
When momentum was held constant (i.e., for a given
column), high-score value stocks performed better
than low-score value stocks. The Q4–Q1 value spread
is the highest for low-score momentum stocks (13.4%).
These results are consistent with prior research (e.g.,
Asness 1997) and imply that value and momentum
returns are not independent. They reflect a reasonable
degree of conditionality.
The negative correlation between value and momen-
tum also influences the number of securities in each
bucket. High-score value (Q4) stocks tend to be
low-score momentum; 36% of all Q4 value stocks are
in Q1 of momentum, and they generated an active
return of 1.8%. High-score momentum (Q4) stocks
tend to be low-score value; 43% of all Q4 momen-
tum stocks are in Q1 of value, and they produced
an active return of 3.8%. Only 3% of the universe
is represented in the Q4/Q4 bucket, which has the
highest annualized active return, 6.2%.
The results depicted in Figure 4 should not come as
a surprise and are, in fact, intrinsically linked to the
performance of the value and momentum factors.
Given that the momentum factor has worked and
that high momentum is predominately weighted in
low-value stocks, the success of momentum relies
heavily on the outperformance of the Q1 value/Q4
momentum bucket. Similarly, the value factor, albeit
to a lesser extent, relies on the outperformance of
the Q4 value/Q1 momentum bucket.
The securities held in the portfolio blend and the
signal blend can also be mapped to the 4 × 4 quartile
Third Quarter 2018
 Constructing Long-Only Multifactor Strategies

Table 4. Comparison of Portfolios’ Exposure, Active-Return, and Active-Risk Contributions:

Russell 1000 Universe, January 1979–June 2016

Signal Blend Portfolio Blend

Shared Exclusively Held Not Held Shared Exclusively Held Not Held
Contribution Securities Securities Securities Securities Securities Securities

A. Low factor exposure

Value exposure 0.20 0.01 0.22 0.27 –0.02 0.18
contribution
Momentum exposure 0.21 0.01 0.22 0.27 –0.01 0.20
contribution
Average active return 3.15% 0.13% –2.52% 3.15% 1.20% –2.62%
Active-return 1.27% –0.01% 1.26% 1.64% 0.12% 1.39%
contribution
Active-risk 1.67% 0.46% 2.13% 2.14% –0.12% 1.53%
contribution

B. High factor exposure

Value exposure 0.43 0.31 0.13 0.70 0.08 0.09
contribution
Momentum exposure 0.52 0.29 0.14 0.84 0.04 0.10
contribution
Average active return 4.62% 3.76% –0.74% 4.62% 4.38% –0.49%
Active-return 2.13% 1.42% 0.63% 3.42% 0.61% 0.43%
contribution
Active-risk 3.48% 2.35% 1.03% 6.19% 1.34% 0.82%
contribution

Figure 4. Value and Momentum

Momentum Interaction: Low High

Quartile Buckets from the Q1 Q2 Q3 Q4 Q4 – Q1
Russell 1000 Universe,
January 1979–June 2016 High Q4 1.8 2.3 1.8 6.2 4.3

Q3 –2.4 –0.5 –0.4 1.7 4.1

Value

Q2 –2.4 –2.5 0.9 1.9 4.3

Low Q1 –11.6 –6.2 –2.2 3.8 15.4

Q4 – Q1 13.4 8.5 4.0 2.3

Note: Data in bold are statistically significant at the 5% level.

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Financial Analysts Journal | A Publication of CFA Institute
matrix (Figure 4). In this case, the portfolio blend
would hold securities in the top row (Q4 value) and
the second-to-last column (Q4 momentum). All the
buckets provided positive contributions to active
return. The mapping is more complicated for the signal
blend but is roughly consistent with the diagram in
Figure 1 (i.e., holdings will be anything to the right of
the diagonal line drawn from the top left to the bot-
tom right of the 4 × 4 matrix). Examining contributions
to active return and risk (not reported), we found that
the signal blend suffers from not holding enough of
the high value/low momentum (Q4/Q1) stocks and
low value/high momentum (Q1/Q4) stocks. The signal
blend also incurs significant risk from holding Q3
value/Q3 momentum stocks, which have a negative
active return (–0.4%). High value/high momentum
(Q4/Q4) stocks earn the highest active return. These
stocks offer a greater benefit to the portfolio blend
because they are double weighted.11
In terms of active-risk contributions, note that high
value/low momentum (Q4/Q1) stocks have a net
positive exposure to value whereas low value/high
momentum (Q1/Q4) stocks have a net positive expo-
sure to momentum. These two groups exhibit a high
negative active-return correlation and are diversify-
ing (i.e., active risk reducing) while delivering positive
active returns. Therefore, the assertion that avoiding
securities with offsetting factor exposures improves
portfolio performance is not entirely correct. If
factor payoffs depict strong interaction effects, then
holding such securities may actually be beneficial and
the portfolio blend will benefit from investing in such
Table 5. Active-Return Decomposition against Fama–French Factors: Russell 1000 Universe,
January 1979–June 2016
Intercept
Portfolio (%, annualized)
A. Low factor exposure
Signal blend 0.49
Portfolio blend 1.07
B. High factor exposure
Signal blend –0.22
Portfolio blend 0.56
Notes: SMB is small minus big. HML is high book/market minus low book/market. WML is winners minus losers. Figures in bold are
statistically significant at the 5% level.
Source: Fama–French factor data obtained from http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.
78 cfapubs.org
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securities. These contextual relationships are also
present to varying degrees in other factor pairings.12
Could the superior performance of the portfolio
blend simply be the result of exposure to uncon-
trolled factors, such as market and size, rather than
the interaction effects between the factors? One
way to answer this question is to regress the active
return (i.e., portfolio return minus the return of the
equal-weighted Russell 1000 benchmark) of the
portfolio blend and the signal blend against the
Fama–French cap-weighted market, size, value, and
momentum factors.
For this purpose, we performed an active-return
decomposition because we were interested in assess-
ing the betas or exposures of the portfolios beyond
those of the equal-weighted Russell 1000 (i.e., active
betas or active exposures). We did not expect this
analysis to produce matched active exposures to
targeted factors because the Fama–French universe,
factor definitions, and construction methodology
are different from ours and holdings-based exposure
measures (e.g., the use of weighted scores, as in our
case) may differ from return-based exposure mea-
sures. Panel A of Table 5 presents the results of this
analysis for the low-factor-exposure portfolios. In this
table, the coefficients of the market factor represent
an active beta (or active exposure). For example,
the portfolio blend has an active beta of 0.01 to the
Fama–French market factor; that is, the portfolio has
a beta that is 0.01 higher than the beta of the equal-
weighted Russell 1000 to the market factor.
SMB HML WML
Market (size) (value) (momentum)
–0.03 –0.01 0.21 0.22
0.01 0.04 0.17 0.17
0.08 0.17 0.20 0.32
0.17 0.31 0.07 0.14
Third Quarter 2018
 Constructing Long-Only Multifactor Strategies
Note in Panel A of Table 5 that the portfolio blend and
the signal blend have small active exposures to the
market and size factors. Both portfolios have similar
active exposures to the value and momentum factors.
The portfolio blend, however, achieves an annual-
ized alpha of 1.07%, which is statistically significant
at the 5% level. This result implies that the superior
performance of the portfolio blend is not the result of
exposures to uncontrolled factors. To analyze the per-
sistence of these results over time, we also calculated
10-year rolling Fama–French factor-adjusted alphas
for the low-factor-exposure portfolios and found
that the alpha of the portfolio blend was consistently
higher than the alpha of the signal blend.
As a next step, we created portfolios that targeted
a much higher level of factor exposures. These
results are reported in the B panels of the tables. In
the signal blend, we selected the top 15% of securi-
ties, which generated an exposure of 0.88 to value
and 0.96 to momentum and an average exposure of
0.92. In the portfolio blend, the individual value and
momentum portfolios included the top 5% of securi-
ties,13 which generated an exposure of 0.87 to value
and 0.98 to momentum and an average exposure of
0.92. Panel B of Table 1 shows that the signal blend
now achieves these high exposures with better diver-
sification, as represented by a higher count percent-
age of universe securities and lower active share.
As expected, the weight distribution is now also
quite different, as reported in Panel B of Table 2. The
overlap is considerably reduced, and securities held
only in the signal blend account for a much higher
proportion of total and active weight.
The signal blend generated a 13% higher IR, as
shown in Panel B of Table 3, with the improvement
driven by lower active risk. The difference in IRs
between the two approaches is not statistically sig-
nificant at the 5% level. Additionally, although match-
ing on active risk was not the primary consideration
in our analysis, when we did so, we found that the
difference in IRs was even smaller (0.61 for the signal
blend and 0.63 for the portfolio blend).
Panel B of Table 4 documents the contributions to
factor exposure, active return, and active risk of the
high-factor-exposure portfolios. The contributions
to factor exposure are more balanced for the signal
blend. Additionally, shared securities now are more
concentrated in the portfolio blend, contribute more
to active return (3.42% versus 2.13%), and contribute
significantly more to active risk (6.19% versus 3.48%)
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than shared securities in the signal blend. Securities
held only in the signal blend also contribute more to
active return (1.42% versus 0.61%) and active risk
(2.35% versus 1.34%) compared with the securities
held only in the portfolio blend. In this case, the
interaction effects are overwhelmed by the high
concentration and stock-specific risk embedded in
the portfolio blend.
Panel B of Table 5 reports the results of an active-
return decomposition against the Fama–French
factors. From this perspective, the signal blend
achieves much higher active exposures to value and
momentum, whereas the portfolio blend has much
higher active exposures to the market and size fac-
tors. The high degree of concentration and stock-
specific risk embedded in the portfolio blend at high
levels of tracking error results in lower exposures to
the Fama–French value and momentum factors (i.e.,
high unexplained risk). In this case, neither the signal
blend nor the portfolio blend realizes a statistically
significant alpha.
Figure 5 plots the average factor exposure against
IR (Panel A) and active risk (Panel B) for the portfolio
blend and the signal blend for the value+momentum
combination, starting with the top 50% signal blend
portfolio.14 At low-to-moderate levels of factor
exposure, the portfolio blend delivers the factor
exposures with lower active risk (i.e., better diversi-
fication) and higher IRs than the signal blend. At high
levels of factor exposure, the signal blend produces
a higher IR through better diversification and lower
active risk. Except for the momentum+volatility
combination, similar patterns were found for various
two-factor combinations.15 For reference purposes,
Panel C of Figure 5 shows an IR comparison when
the two portfolios were matched on active risk.
Next, we added quality as a third factor. We defined
it as gross profits scaled by total assets (Novy-Marx
2013), and we added it at a weight equal to that of
value and momentum. Because of the value fac-
tor’s negative correlation with both momentum and
quality, we observed a lower exposure to value in
both the signal blend and the portfolio blend. We
matched the exposures for these three factors in
both approaches.16 To create a four-factor com-
parison of the two approaches, we simply took the
three-factor portfolios and adjusted the volatility
exposures.17 This step effectively matched all four
factor exposures, as shown in Table 6, for the case in
which the signal blend selected the top 50% of the
names, based on the composite signal.18
79
Financial Analysts Journal | A Publication of CFA Institute

Figure 5. Average Exposure against

Table 6. Comparison of Four-Factor
IR, Active Exposure against Active Risk,
Portfolio Exposures: Russell 1000
and Active Risk against IR: Russell 1000
Universe, January 1979–June
Universe, January 1979–June 2016
2016
A. IR and Average Exposure
IR Value Momentum Quality Volatility
1.0 Portfolio  Exposure Exposure Exposure Exposure
0.9
0.8 Signal 0.22 0.43 0.46 0.15
0.7
0.6 blend
0.5
0.4 Portfolio 0.23 0.45 0.47 0.15
0.3 blend
0.2
0.1
0
0.44 0.64 0.84 1.04 1.24 1.44
Average Exposure Figure 6. Average Exposure and IR:
Four-Factor Portfolios from Russell 1000
B. Acve Risk and Average Exposure Universe, January 1979–June 2016
Acve Risk (%)
IR
12
1.2
10
1.0
8
0.8
6
0.6
4
0.4
2
0.2
0
0
0.44 0.64 0.84 1.04 1.24 1.44
0.31 0.41 0.51 0.61 0.71 0.81
Average Exposure
Average Exposure

C. IR and Acve Risk Signal Blend Porolio Blend

IR
1.0
0.9 emerging markets. Figure 7 and Figure 8 plot the aver-
0.8
0.7 age exposure and IR profile for the value+momentum
0.6 and the four-factor combinations for, respectively,
0.5
0.4 the MSCI World ex USA universe from January 1995
0.3 through June 2016 and the MSCI Emerging Markets
0.2
0.1 universe from January 1998 through June 2016.19
0 We found that the differences in IR between the two
3.85 5.85 7.85 9.85 11.85 approaches were not statistically significant at the 5%
Acve Risk (%) level except for some of the extreme high-exposure
Signal Blend Porolio Blend
factor combination portfolios.

Transparency and Other Portfolio

Figure 6 plots the average factor exposure against IR
for the four-factor portfolios. Overall, the pattern is
quite consistent with the pattern observed with the
value+momentum combination.
The results for the US market were generally vali-
dated when we analyzed other developed and global
Objectives
In the structure and design of smart-beta multifac-
tor offerings, simplicity, rules-based approaches,
and transparency are key considerations for asset
owners in addition to investment efficiency. These
features create an important distinction between

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 Constructing Long-Only Multifactor Strategies

Figure 7. Average Exposure and IR Figure 8. Average Exposure and IR

for Value+Momentum and Four-Factor for Value+Momentum and Four-Factor
Combinations: MSCI World ex USA Combinations: MSCI Emerging Markets
Universe, January 1995–June 2016 Universe, January 1998–June 2016
A. Value+Momentum A. Value+Momentum
IR IR
1.0 1.6
0.9 1.4
0.8 1.2
0.7
0.6 1.0
0.5 0.8
0.4 0.6
0.3
0.2 0.4
0.1 0.2
0 0
0.45 0.65 0.85 1.05 0.45 0.65 0.85 1.05 1.25
Average Exposure Average Exposure

B. Value+Momentum+Quality+Volality B. Value+Momentum+Quality+Volality
IR IR
1.2 1.6
1.0 1.4
1.2
0.8
1.0
0.6 0.8
0.4 0.6
0.4
0.2
0.2
0 0
0.36 0.46 0.56 0.66 0.76 0.86 0.36 0.46 0.56 0.66 0.76 0.86 0.96
Average Exposure Average Exposure
Signal Blend Porolio Blend Signal Blend Porolio Blend

smart-beta and traditional active quantitative
strategies.
In our experience, transparency in performance attri-
bution has become a key objective for asset owners.
Transparency means that the source of risk and return
embedded in the strategy is well understood. Gaining
a full understanding of the source of risk and return
is difficult without transparency in performance
attribution. This aspect is particularly important in
a diversification strategy based on factors because
multiple factors introduce multiple sources of risk
and return. The portfolio-blending approach is better
suited to meeting this key objective than the signal-
blending approach. The reason is that the building-
block framework of portfolio blending facilitates
cause-and-effect performance attribution, in which
the overall portfolio return is directly attributed to
each underlying factor portfolio.
Table 7 shows an illustration of the factor-level
performance attribution made possible by portfolio
blending. It provides a direct measure of active
return and active risk for the individual-factor portfo-
lios making up the portfolio blend, an insight not eas-
ily observable in the signal blend. The active return
of the portfolio blend is the average of the value and
momentum portfolios, with momentum performing
modestly better than value (3.31% versus 3.01%).
The diversification benefits, which arise from the
negative active-return correlation between value and
momentum, are evidenced by the significantly lower
active risk of the portfolio blend compared with that
of the individual-factor portfolios. The active-risk
reduction (or gain from diversification) results in a
much higher IR for the portfolio blend relative to
the individual-factor portfolios. Note also that the
momentum portfolio has higher active risk than the
value portfolio (9.32% versus 6.85%), suggesting that

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Financial Analysts Journal | A Publication of CFA Institute

may also wish to choose different providers for each

Table 7. Transparency in Factor-Level factor portfolio on the basis of the provider’s demon-
Attribution: Russell 1000 strated skill or implementation efficiency. For example,
Universe, January 1979– some providers allow asset owners to implement the
June 2016 selected strategy in-house through the use of cost-
effective licensing agreements.
Active Active Information
Portfolio Return Risk Ratio
Investment Process Considerations
Signal blend 2.52% 4.25% 0.59
Portfolio blend 3.15 3.55 0.89
and Focus of Debate
In addition to the aspects analyzed here, the way
    Value portfolio 3.01 6.85 0.44
managers define, construct, and implement fac-
    Momentum portfolio 3.31 9.32 0.36 tor investing may influence the favorability of one
approach versus the other. For example, consider
the simple case of value. Fitzgibbons et al. (2017)
defined value as book value/price. Fraser-Jenkins,
diversification could be improved by a better balance
Guerrini, Harmsworth, Diver, McCarthy, Stancikas,
of active risk.
and Hughes (2016) defined value as a blend of book
The portfolio blend and the individual-factor portfo- value/price, 12-month forward P/E, and dividend
lios also lend themselves to detailed and transparent yield. Bender and Wang (2016) defined value as an
performance attribution at the levels of country mar- equally weighted combination of five valuation ratios,
kets, sectors, and individual stocks. Table 8 illustrates in which the fundamental variables are five-year
a sector-level attribution in which total active return exponentially weighted averages of sales, earnings,
and active risk are decomposed into sector allocation book value, dividends, and cash flow. These diverse
and selection within sectors. definitions of value are likely to result in different
correlations between value and other factors, such as
Another objective that may lead asset owners to conventional momentum. Furthermore, the method
prefer the implementation of multifactor strategies by which factors are normalized and factor signals
through individual-factor portfolios or through a are constructed—z-scoring, ordinal ranking, or fixed
portfolio blend is retaining the ability to time factors multipliers—may also play a role. Finally, the weight-
themselves, rather than delegate timing decisions to ing scheme—equal weighting, cap weighting, scaled
an investment manager. Additionally, asset owners cap weighting, signal weighting and optimizing—may
may have governance considerations that lead them affect correlations and efficiency of factor capture.
to define factors and exposures in terms of individual-
factor portfolios to facilitate internal discussions about For another example, consider that one advantage
achieving persistent factor exposures or performance of signal blending over portfolio blending is often
benchmarking of active style managers. Asset owners said to be the improvement in trading efficiency

Table 8. Transparency in Sector-Level Attribution: Russell 1000 Universe, January 1979–June

2016

Active Return Active Risk Information Ratio

Within Within Within
Portfolio Sector Sector Total Sector Sector Total Sector Sector Total

Signal blend 0.47% 2.06% 2.52% 2.44% 2.44% 4.25% 0.19 0.84 0.59
Portfolio blend 0.67 2.49 3.15 2.08 2.14 3.55 0.32 1.16 0.89
Value portfolio 0.47 2.54 3.01 3.94 4.42 6.85 0.12 0.57 0.44
Momentum portfolio 0.89 2.43 3.31 3.95 6.11 9.32 0.23 0.40 0.36

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 Constructing Long-Only Multifactor Strategies
that arises from the natural netting of trades taking
place in the signal blend portfolio. Fitzgibbons et
al. (2017), for instance, reported one-way turnover
savings of 5% for portfolios with annual turnover of
around 100% and a 10% savings with unconstrained
turnover. This argument is valid in the context of a
simulation setup but may not fully reflect real-life
implementation. In practice, some managers have
designed trade-netting and turnover mitigation
processes to take advantage of low or negative
cross-sectional correlations when combining factor
portfolios. For instance, our research and practi-
cal experience demonstrate that such processes
typically generate a 40%–50% reduction in turnover
compared with a naive portfolio blend.
Varying results arising from methodological differ-
ences imply that the focus of the current debate,
which seeks to reach a general conclusion on the
superiority of one approach versus the other, may be
misplaced. The way a manager defines, constructs,
and implements factor strategies can have a mean-
ingful impact on the correlation structure and the
efficiency of factor capture. Thus, we believe that a
decision about the best way to capture factor effects
is most appropriately made in the context of a given
investment process.
Conclusion
Using exposure-matched portfolios, we compared
portfolio-blending and signal-blending approaches
for constructing long-only multifactor strategies.
From an investment efficiency perspective, we
found that at low-to-moderate levels of factor
exposure, the portfolio blend generally produces
higher IRs for various two-, three-, and four-factor
combinations for different geographical regions.
This finding is driven by the interaction effects
between the factors. Securities with offset-
ting factor exposures held only in the portfolio
blend reduced active risk while also contributing
positively to active return. At high levels of fac-
tor exposure and tracking error, these interaction
effects were overwhelmed by high concentrations
and stock-specific risk in the portfolio blend. In such
cases, the signal-blending approach retained better
diversification and generated higher IRs. Tests on
the difference in IRs between the two approaches
showed little statistical significance except in
the case of the value+momentum low-exposure
combination in the US market and in some of the
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extreme high-exposure factor combinations in other
markets.
Other arguments in favor of the portfolio-blending
approach may include the following. First, although
discussing the appropriate level of active risk to
be pursued in capturing factors is not the focus
of this article, we note that factors tend to have
relatively low levels of information coefficients
(return predictability). The implication is that their
capture preferably should be implemented with
high diversification. So, pursuing smart-beta diver-
sification strategies at high levels of tracking error
and concentration may not be appropriate or even
philosophically consistent with factor capture. In
our experience, in implementing multifactor smart-
beta strategies, investors typically pursue active
risk in the range of 1%–3%, depending on whether
the strategies are viewed as an alternative to pas-
sive or active management. At such moderate lev-
els of tracking error, portfolio blending is at least
as efficient as signal blending, if not more. Second,
portfolio blending may better reflect other aspects
of factor capture in the construction of individual-
factor portfolios than does signal blending. For
example, constraints to mitigate turnover as well
as unrewarded risks can be applied directly to a
specific factor portfolio. Third, additional portfolio
objectives, such as transparency in performance
attribution, ability to time factors, and governance
considerations, are better accommodated by the
individual-factor portfolios or the portfolio blend.
We believe that our findings have important
practical implications for investors considering the
implementation of multifactor strategies. Existing
studies make the argument that investors forgo
investment efficiency when they adopt a portfolio-
blending approach in pursuit of other objectives,
such as transparency in portfolio construction and
performance attribution, flexibility, and cost effi-
ciency in implementation. Our findings suggest that
there is no trade-off between investment efficiency
and these additional investment objectives. At the
low-to-moderate levels of tracking error that asset
owners generally pursue in allocating to multifactor
smart-beta strategies, investors can pursue these
objectives without concerns relating to loss of
investment efficiency.
These arguments notwithstanding, we also believe
that a discussion of the relative merits of portfolio
blending versus signal blending needs to be con-
ducted in the context of a given investment process
83
Financial Analysts Journal | A Publication of CFA Institute

and the objectives of the asset owners. Portfolio Editor’s Note

construction invariably involves balancing conflict-
ing objectives, such as factor representation versus
implementation costs, capacity versus efficiency,
or transparency versus efficiency. How a manager
deals with these trade-offs defines the salient
features of the investment process, which, in turn,
influence the decision whether to blend portfolios
or signals in the construction of smart-beta multi-
factor strategies.
Submitted 30 March 2017
Accepted 16 March 2018 by Stephen J. Brown
Disclosure: The views and opinions expressed herein are
those of the authors. The backtests and analysis described
are provided for educational purposes in reliance on past
market data with the benefit of hindsight and do not reflect
actual results. If any assumptions used do not prove to be
true, results may vary substantially. Our research does not
take into account specific investment objectives or investor
guidelines or restrictions. Investors must also consider
suitability, liquidity needs, and investment objectives when
determining appropriate asset allocation.

Notes
1. For a stock i, when capitalization weights, bi, are scaled by extended the analysis to include quality and volatility
a rank score, Si, the weight of stock i in the signal blend, factors.
WiS , and the portfolio blend, WiP , can be calculated for any
6. These standard definitions of value and momentum are
two factors A and B as follows. For the signal blend,
well documented in the academic literature.
 S A + SB 
WiS = bi  i i ,
7. January 1979 is the start date for the Russell 1000 Index.
 A+B 
 S  The June 2016 end date reflects completion of our
research.
and for the portfolio blend,
8. In this approach, we matched average exposures over
1b S
A
b SB  time. Another approach would be to match factor
WiP =  i i + i i  exposures at each rebalancing date. The time variation in

2 S A
S B 
factor exposures does not create meaningful performance
A
1  Si SB  differences between the two approaches.
= bi  + i 
2 S  A
S B 
9. The portfolios were exposure-matched for the targeted
( ) ( )
 S A + B 2 S A S A + S A + B 2 S B SB 
= bi 
i i  factors, but they may have had differences in other, non-
S A+B , targeted factor exposures. We did not attempt to control
  for these ancillary exposures.

10. We used the circular block bootstrap methodology

where S A = ∑bi SiA is benchmark exposure (weighted rank outlined in Section 3.2.2 of Ledoit and Wolf (2008) with
score) to factor A and S B = ∑ bi SiB is benchmark exposure the optimal block size determined by Algorithm 3.1 in their
(weighted rank score) to factor B. In this weighting paper.
methodology, therefore, stock weights differ only as a result
11. We also tested the implications of equal weighting the
of signal weightings. The signal blending weights signals
high momentum/high value (Q4/Q4) stocks in the portfolio
equally, whereas the portfolio blending weights signals
blend and found no meaningful differences in IRs for the
proportional to a signal’s benchmark exposure.
two weighting schemes.
2. The general conclusions remain unchanged for cap
12. Results are available from the authors upon request.
weighting.
13. Because of the high degree of concentration needed in
3. We also explored signal weighting, in which active weights
the individual-factor portfolios, there is a limit to the high
are made proportional to the signal, and found gener-
exposures that can be achieved in the portfolio-blending
ally consistent results when signals were based on rank
approach.
scoring. Rank scoring is the preferred approach for the
portfolio blend because z-score signals result in high
14. A portfolio with a lower exposure can be attained by scal-
concentrations in the individual-factor portfolios.
ing the positions of a higher-exposure portfolio. Therefore,
the highest-IR portfolio on the frontier can be used to
4. The framework can be extended to incorporate more than
produce a portfolio with the same IR at any desired lower
two factors.
exposure level.
5. Simulations based on a capitalization-weighted universe
15. These results are available from the authors upon request.
and factor portfolios produced similar results. We later

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 Constructing Long-Only Multifactor Strategies
16. This matching can be achieved by either weighting signals
in the signal blend or weighting portfolios in the portfolio
blend. We chose to weight signals because it is a much
simpler approach.
17. To equalize the volatility exposures, we added volatility at
a 10% weight to the signal blend. Volatility is defined as
the inverse of the standard deviation of the last 12-month
daily total returns.
References
Asness, Clifford S. 1997. “The Interaction of Value and
Momentum Strategies.” Financial Analysts Journal 53 (2):
29–36.
Bender, Jennifer, and Taie Wang. 2016. “Can the Whole Be
More Than the Sum of the Parts? Bottom-Up versus Top-
Down Multifactor Portfolio Construction.” Journal of Portfolio
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Clarke, Roger, Harindra de Silva, and Steven Thorley. 2016.
“Fundamentals of Efficient Factor Investing.” Financial Analysts
Journal 72 (6): 9–26.
Fitzgibbons, Shaun, Jacques Friedman, Lukasz Pomorski, and
Laura Serban. 2017. “Long-Only Style Investing: Don’t Just
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18. The size exposure in the two portfolios is also similar: –0.02
for the signal blend and –0.04 for the portfolio blend.
19. The January 1995 start date for the MSCI World ex USA
backtest and the January 1998 start date for the MSCI
Emerging Markets backtest are based on the availability of
fundamental index data. The June 2016 end date reflects
completion of our research.
Fraser-Jenkins, Inigo, Alix Guerrini, Alla Harmsworth, Mark
Diver, Sarah McCarthy, Robertas Stancikas, and Maureen
Hughes. 2016. How to Combine Factors? It Depends Why You
Are Doing It. New York: AllianceBernstein.
Ledoit, Oliver, and Michael Wolf. 2008. “Robust Performance
Hypothesis Testing with the Sharpe Ratio.” Journal of Empirical
Finance 15 (6): 850–59.
Leippold, Markus, and Roger Rϋegg. 2017. “The Mixed vs.
the Integrated Approach to Style Investing: Much Ado about
Nothing?” European Financial Management (3 November).
Novy-Marx, Robert. 2013. “The Other Side of Value: The
Gross Profitability Premium.” Journal of Financial Economics
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