Financial Analysts Journal May/June 2013 Volume 69 Issue 3
Factor-Based Asset Allocation vs. Asset-Class-Based Asset Allocation
Abstract
This article addresses the issue of the alleged superiority of risk-factor-based asset allocations over the more traditional asset-class-based asset allocation. The authors used both an idealized model, capable of precise mathematical treatment, and optimizations based on different periods of historical data to show that neither approach is inherently superior to the other. Although the authors appreciate the role of risk models in portfolio management, they urge caution with respect to unwarranted claims of their dominance.
About the Author(s)
Thomas M. Idzorek, CFA, is the global chief investment officer for Morningstar's Investment Management Division, which includes Morningstar's global investment management operations and the company’s three U.S.-based registered investment advisers Ibbotson Associates, Morningstar Associates, and Morningstar Investment Services. He manages the research department and a team of PhD researchers and is responsible for the division's overall research agenda, new product development, and adaptation of best-practices investment approaches across the division. Mr. Idzorek also oversees the investment policy committee for the Investment Management Division and serves on Morningstar's retirement plan committee. Previously, he served as the senior quantitative researcher for Zephyr Associates, where he developed and researched financial models and techniques for inclusion in the company's analytical software. Mr. Idzorek has authored numerous articles on asset allocation topics and has expertise in lifetime asset allocation, strategic asset allocation, tactical (dynamic) asset allocation, liability-relative investing, asset allocation implementation, fund-of-funds optimization, risk budgeting, return-based style analysis, and performance analysis. He received a bachelor's degree in marketing from Arizona State University and a master's degree in business administration from Thunderbird School of Global Management.