Factors and Advisor Portfolios

Abstract

In the approximately 10,000 advisor portfolios analyzed at the security level, the authors find large common patterns and significant exposures to just a few factors. Advisor portfolios are heavily exposed to economic growth, which is mostly accessed through equities and could obtain better factor balance by including other diversifiers. Within equities, the only significant style exposure is small size; advisors, in general, can potentially improve returns by harvesting other rewarded style factors. In fixed income, advisor portfolios veer toward shorter duration, which can be lengthened in an effort to provide more resilience against economic downturns. Finally, the average advisor fee is 0.54% across all portfolios, but with a wide range from 0.14% to 0.96% at the 5th and 95th percentiles, respectively. These fees, however, do not correlate highly with absolute levels of risk, active risk, or the number of positions—implying large scope to obtain greater efficiencies in taking active risk within a given fee budget.

TOPICS: Analysis of individual factors/risk premia, factor-based models, style investing, portfolio theory, portfolio construction

Key Findings

• • Advisor portfolios have a large exposure to economic growth, which is mostly accessed through their equity exposure. Long-short funds—specifically liquid alternatives—can offer diversification away from economic growth and improve the risk-reward ratio

• • On average, advisor portfolios don’t have meaningful exposures to rewarded factors like quality, low volatility, value, momentum, and dividend yield. Advisor portfolios do tend to have significant positive exposure to the small size factor, which reflects exposure to stocks with lower market capitalizations.

• • The duration of advisor portfolios tends to be lower than their benchmark. Even more aggressive portfolios with higher allocations to equity remain short duration, even though it is an effective diversifier of equity risk.