PT - JOURNAL ARTICLE AU - Louis Scott AU - Stefano Cavaglia TI - Practical Applications of A Wealth Management Perspective on Factor Premia and the Value of Downside Protection AID - 10.3905/pa.6.1.278 DP - 2018 Jul 31 TA - Practical Applications PG - 1--5 VI - 6 IP - 1 4099 - https://pm-research.com/content/6/1/1.12.short 4100 - https://pm-research.com/content/6/1/1.12.full AB - Capital preservation is one of the major concerns of long-term investing, and how best to protect a portfolio against drawdowns is one of its most vexing challenges. Louis Scott and Stefano Cavaglia turned to factor premia, or smart beta, and studied its effects on a 30-year, goals-based investment strategy. They find that, to date, there is limited but very suggestive evidence that supports the downside protection properties of factor premia, and hence their ability to mitigate drawdowns.In their article, A Wealth Management Perspective on Factor Premia and the Value of Downside Protection published in the Spring 2017 issue of The Journal of Portfolio Management, the authors provide a framework for empirically estimating the value of downside protection offered by a combination of conventional factor premia (value, size, momentum, and quality) overlaid on a portfolio of the developed global equity universe. They find that the premia help reduce the likelihood that investor will lose a significant portion of initial capital by the time of retirement, even if the expected return of the premia were reduced by half. They find also that the premia enhance the distribution of terminal wealth. Finally, their analysis shows that active asset allocation strategies require market-timing skill beyond the reach of most investors in order to outperform a factor premia–based strategy.TOPICS: Analysis of individual factors/risk premia, portfolio construction, emerging, risk management