Asset Management: A Systematic Approach to Factor Investing

717 Pages·2014·9.47 MB·English

by  Andrew Ang

Asset Management
FINANCIALMANAGEMENTASSOCIATION
SurveyandSynthesisSeries
AssetPricingandPortfolioChoiceTheory
KerryE.Back
BeyondGreedandFear:UnderstandingBehavioralFinanceandthePsychologyofInvesting
HershShefrin
BeyondtheRandomWalk:AGuidetoStockMarketAnomaliesandLow-RiskInvesting
VijaySingal
DebtManagement:APractitioner’sGuide
JohnD.FinnertyandDouglasR.Emery
DividendPolicy:ItsImpactonFirmValue
RonaldC.Lease,KoseJohn,AvnerKalay,UriLoewenstein,andOdedH.Sarig
Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation,
2ndEdition
RichardO.MichaudandRobertO.Michaud
LastRights:LiquidatingaCompany
Dr.BenS.Branch,HughM.Ray,RobinRussell
ManagingPensionandRetirementPlans:AGuideforEmployers,Administrators,andOtherFiduciaries
AugustJ.Baker,DennisE.Logue,andJackS.Rader
ManagingPensionPlans:AComprehensiveGuidetoImprovingPlanPerformance
DennisE.LogueandJackS.Rader
MortgageValuationModels:EmbeddedOptions,Risk,andUncertainty
AndrewDavidsonandAlexLevin
RealEstateInvestmentTrusts:Structure,Performance,andInvestmentOpportunities
SuHanChan,JohnErickson,andKoWang
RealOptions:ManagingStrategicInvestmentinanUncertainWorld
MarthaAmramandNalinKulatilaka
RealOptionsinTheoryandPractice
GraemeGuthrie
SlappedbytheInvisibleHand:ThePanicof2007
GaryB.Gorton
SurveyResearchinCorporateFinance:BridgingtheGapbetweenTheoryandPractice
H.KentBaker,J.ClaySingleton,andE.TheodoreVeit
TheFinancialCrisisofOurTime
RobertW.Kolb
TheSearchforValue:MeasuringtheCompany’sCostofCapital
MichaelC.Ehrhardt
TooMuchIsNotEnough:IncentivesinExecutiveCompensation
RobertW.Kolb
TradingandExchanges:MarketMicrostructureforPractitioners
LarryHarris
TruthinLending:Theory,History,andaWayForward
ThomasA.DurkinandGregoryElliehausen
ValueBasedManagementwithCorporateSocialResponsibility,2ndEdition
JohnD.Martin,J.WilliamPetty,andJamesS.Wallace
ValuingtheCloselyHeldFirm
MichaelS.LongandThomasA.Bryant
WorkingCapitalManagement
LorenzoPreveandVirginiaSarria-Allende
Asset Management
A Systematic Approach to Factor Investing
ANDREW ANG
3
3
OxfordUniversityPressisadepartmentoftheUniversityofOxford.
ItfurtherstheUniversity’sobjectiveofexcellenceinresearch,scholarship,
andeducationbypublishingworldwide.
OxfordNewYork
Auckland CapeTown DaresSalaam HongKong Karachi
KualaLumpur Madrid Melbourne MexicoCity Nairobi
NewDelhi Shanghai Taipei Toronto
Withofficesin
Argentina Austria Brazil Chile CzechRepublic France Greece
Guatemala Hungary Italy Japan Poland Portugal Singapore
SouthKorea Switzerland Thailand Turkey Ukraine Vietnam
OxfordisaregisteredtrademarkofOxfordUniversityPress
intheUKandcertainothercountries.
PublishedintheUnitedStatesofAmericaby
OxfordUniversityPress
198MadisonAvenue,NewYork,NY10016
©AndrewAng,2014
Allrightsreserved.Nopartofthispublicationmaybereproduced,storedina
retrievalsystem,ortransmitted,inanyformorbyanymeans,withouttheprior
permissioninwritingofOxfordUniversityPress,orasexpresslypermittedbylaw,
bylicense,orundertermsagreedwiththeappropriatereproductionrightsorganization.
InquiriesconcerningreproductionoutsidethescopeoftheaboveshouldbesenttotheRights
Department,OxfordUniversityPress,attheaddressabove.
Youmustnotcirculatethisworkinanyotherform
andyoumustimposethissameconditiononanyacquirer.
LibraryofCongressCataloging-in-PublicationData
Ang,Andrew.
Assetmanagement:asystematicapproachtofactorinvesting/AndrewAng.
p. cm.—(FinancialManagementAssociationsurveyandsynthesisseries)
Includesbibliographicalreferencesandindex.
ISBN978–0–19–995932–7(alk.paper)
1.Asset-backedfinancing.2.Capitalassetspricingmodel.3.Investments.I.Title.
HG4028.A84A542014
332.601—dc23
2013042000
9 8 7 6 5 4 3 2 1
PrintedintheUnitedStatesofAmericaonacid-freepaper
ToJihong

CONTENTS
Preface ix
PART I ■ THE ASSET OWNER
1. AssetOwners
CHAPTER 3
2. Preferences
CHAPTER 35
3. Mean-VarianceInvesting
CHAPTER 71
4. InvestingfortheLongRun
CHAPTER 113
5. InvestingOvertheLifeCycle
CHAPTER 149
PART II ■ FACTOR RISK PREMIUMS
6. FactorTheory
CHAPTER 193
7. Factors
CHAPTER 213
8. Equities
CHAPTER 240
9. Bonds
CHAPTER 271
10. Alpha(andtheLow-RiskAnomaly)
CHAPTER 305
vii
viii Contents
11. “Real”Assets
CHAPTER 346
12. Tax-EfficientInvesting
CHAPTER 386
13. IlliquidAssets
CHAPTER 410
14. FactorInvesting
CHAPTER 442
PART III ■ DELEGATED PORTFOLIO MANAGEMENT
15. DelegatedInvesting
CHAPTER 491
16. MutualFundsandOther40-ActFunds
CHAPTER 519
17. HedgeFunds
CHAPTER 556
18. PrivateEquity
CHAPTER 592
Afterword 621
Appendix 625
Acknowledgments 631
References 633
AuthorIndex 677
SubjectIndex 691
PREFACE
ASSET MANAGEMENT
Thetwomostimportantwordsininvestingarebadtimes.
Thatnotion—thatbadtimesareparamount—istheguidingprincipleofthis
book, and it is based on more than a half century of financial theory. I offer a
systematicapproachtotheage-oldproblemofwheredoyouputyourmoney?My
experienceasafinanceprofessorandanadvisortosovereignwealthfunds,asset
managementfirms,andotherfirmsinthefinanceindustryhasledmetoseethat
thenarrowapproachfocusingonlyonassetclasses(usuallywithmean-variance
optimizers) is too crude, misses the economics of why assets earn returns, and
is ultimately too costly to serve investors adequately. I focus instead on “factor
risks,”thesetsofhardtimesthatspanassetclasses,whichmustbethefocusof
our attention if we are to weather market turmoil and receive the rewards that
comewithdoingso.
The essential problem is that asset owners—from a modest household to
sovereign wealth funds entrusted with the savings of a nation—generally feel
thepainofbadtimesmuchmoreacutelythantheydotheelationofgoodtimes.
Differentinvestorseachhavetheirownsetofbadtimesdefinedbytheirliabili-
ties,incomestreams,constraintsandbeliefs,andhowtheyperceiveandreactto
differentkindsofrisks.Badtimesaremorethanjustperiodswhenyourwealth
has taken a hit: you can still be rich and encounter bad times if your consump-
tiondropsbelowwhatyouareusedto,orifyourcompetitorgeneratesahigher
returnthanyourportfolio.Asinvestorsmovethroughtheirlifecyclesandasthey
dynamicallyinvestoverlonghorizons,theirsetofbadtimescanchange.Optimal
portfolioallocationinvolvestakingintoaccountaninvestor’sbadtimes,andac-
ceptingtherisksofthesebadtimesinexchangeforthecompensationoffactor
premiums,whicharen’tavailablewithouttakingrisk.Holdingdiversifiedportfo-
lioslessenstheimpactofbadtimesbecausethereisapossibilitythatsomeassets
willhavehighreturnswhenthebadtimeshit.ThisdescribesPartIofthebook.
ix