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Equity factor investing according to the macroeconomic environment

The essential

  • Why equity factor investing makes sense
  • Defining the macroeconomic cycle
  • Establishing relationships between the macroeconomic cycle and equity risk factors

   - Minimum Volatility
   - Momentum
   - Value
   - Growth
   - High Dividend
   - Quality
   - Mid Cap 

  • Dynamic allocation based on macroeconomic scenarios
  • Addressing the macroeconomic scenario: approaches and challenges
  • Conclusion





Amundi Discussion Papers Series - November 2015





Factor investing is gaining interest among investors and asset owners and becoming a very common practice in modern asset allocation. The investigation of risk factors goes back a long time. Researchers have generally focused on factors that could effectively explain stocks’ returns, ideally characterised by persistent value added (a positive risk premium). Such factors have traditionally been employed in investment processes for several purposes: as a tool for risk management and portfolio analysis, as a tool for tilting portfolios with tactical exposure, and as a means of building portfolios with structural long-term characteristics (so-called “style” portfolios such as value, growth, and small-cap equity funds).

In this study, we focus on equity-related factors and introduce a factor investing model based on the macroeconomic cycle. Our macroeconomic cycle is characterised by four phases (expansion, deceleration, weakness and recovery). We investigate the relationships among each of these phases and the performance of equity factors with regard to both empirical significance and consistency with economic rationale. Finally, we establish a rule-based approach for assessing the current phases and predicting the future phases of the macroeconomic cycle in order to implement factor allocation accordingly.

RUSSO, CFA Alessandro , Head of Equity Quant Research at Amundi

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