Factor Timing in Asset Management: A Literature Review

While static factor-based investing is nowadays a common way of allocating portfolios, the next step, a dynamic progression towards time-varying components and factor cyclicity, is still far less established. This study offers a survey on the state of the art of factor timing in asset management and presents the main approaches discussed in the finance literature as well as empirical evidence on the performance of factor timing investment strategies. It becomes obvious that factor timing is much older than first assumed and that there is a diverse collection of approaches. In addition, empirical results on the economic benefits are conflicting. On the one hand, factor timing has the potential to generate economic wealth for long-term oriented institutional investors. On the other hand, high turnover and high transaction costs might limit returns. Furthermore, available data and literature are scarce, leading to challenges in comparing studies. These different perspectives are driving the debate in the finance literature.