Financial Analysts Journal 02 Oct 2017 Volume 73 Issue 4
Estimating Time-Varying Factor Exposures (Corrected October 2017)
We develop a methodology to estimate dynamic factor loadings using cross-sectional risk characteristics. Applying it to a dataset of US-domiciled mutual funds, we distinguish the components of active returns attributable to (1) constant factor exposures (e.g., a tilt to value stocks), (2) time-varying factor exposures, and (3) security selection. We find that large-cap growth funds tend to be concentrated in two factors (momentum and quality) whereas large-cap blend funds have the most factor diversity. We also find that common measures to gauge manager skill may be misleading.
About the Author(s)
Andrew Ang, PhD, is managing director at BlackRock, New York City.
Ananth Madhavan is managing director at BlackRock, Inc., San Francisco.
Aleksander Sobczyk is director at BlackRock, Inc., San Francisco.