Don’t Get Carried Away: Uncovering Macro Characteristics in Carry Portfolios

Multi-Asset Value Payoff: Is Recent Underperformance Cyclical?

“…Using an alternate approach of factor-mimicking portfolio performance attribution methodology, we find further evidence that the payoff to value portfolios in various asset classes is strongly linked to relative growth and inflation expectations across countries. Our results provide fresh evidence of a link between the well-known macroeconomic exposures of traditional asset classes and those of multi-asset risk premia portfolios (Aiolfi and Tokat-Acikel 2019).…”

“…The literature (Ilmanen et al 2019;Bellone et al 2019) has sought to link the value payoff to global inflation and real growth. To check this assertion, we measured the net inflation and real growth characteristics directly from the holdings of the value portfolio by borrowing the framework introduced by Zangari (2003), applied to multi-asset carry portfolios by Aiolfi and Tokat-Acikel (2019). Taking advantage of the cross-country inflation and growth expectations implicit in every value portfolio, we multiplied country weights in the portfolio by their forecasted rates of inflation and real GDP, to derive the net inflation and real growth characteristics embedded in each asset class value portfolio at each point in time.…”

“…It is typical to find weak relationships between returns and macro fundamentals, as net growth and inflation exposures are very slow-moving, while returns are highly variable. Aiolfi and Tokat-Acikel (2019) propose an alternate way of linking these by constructing factor-mimicking macro portfolios. Following this approach, we construct factor-mimicking portfolios for growth and inflation, then we calculate the return on these portfolios.…”