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Defensive factor positioning

Dec 10, 2018
By BlackRock

A framework for bolstering portfolio resiliency

Controlling risks holistically across a multi-asset portfolio can be one of the most effective ways to maximize portfolio resiliency. Building a portfolio that is diversified across asset classes is often the first line of defense, but such a portfolio can still suffer major setbacks because the returns of many nominally diverse asset classes are driven by a small number of common macro factors.

Incorporating macro factor insights in the asset allocation process may introduce greater portfolio resiliency compared to a traditional asset-class-based portfolio, but even well-balanced portfolios are subject to drawdowns in certain stressed markets. If investors can identify extreme market environments and reduce risks accordingly, they may be able to reduce the severity of drawdowns and improve long-term results.

One possible way to achieve this goal is to proactively use market signals to reduce exposures to individual factors or assets when outlooks appear unfavorable. We call this process defensive factor positioning, and it represents an approach to mitigating risk by adjusting the risk allocations of a portfolio in the face of extreme market conditions.

Factor framework

Three steps to increasing portfolio resiliency

Defensive Factor Image

Source: BlackRock, November 2018. For illustrative purposes only.

We believe that managing risk in a fashion that can mitigate drawdowns should be a goal for all investors hoping to maximize long-term total portfolio results, and that defensive factor positioning can play an important role. Given the myriad uncertainties in the current market environment, now is an opportune time to consider how defensive factor positioning may help when the next bout of market turbulence inevitably arrives.

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