BlackRock: reserves management with factors and reference portfolios

Factors - historically broad and persistent sources of return - can be used with simple equity-bond Reference Portfolios to meet the multiple challenges facing official reserve institutions. First, Reference Portfolios can be constructed to reflect the risk appetite of stakeholders, provide clear accountability, and benchmark the value added by institutional management. Second, institutions can use strategies designed to harvest factor premiums transparently and at low cost. When used at the total portfolio level, factors can inform the structure of a Strategic Portfolio, and help manage stakeholder expectations with scenario analysis. Factors can also be used at a more tactical level, in combination with other active strategies to seek incremental returns in excess of strategic benchmarks.