Optimal Tilts: Combining Persistent Characteristic Portfolios

We examine the optimal weighting of four tilts in US equity markets over 1968-2014. We define a "tilt" as a characteristics-based portfolio strategy that requires relatively low annual turnover. This definition forms a continuum, with small size, a very persistent characteristic, at one end of the spectrum and high-frequency reversal at the other. Unlike with low-turnover tilts, a full history of transaction costs is essential for determining the expected return of, and thus the optimal allocation to, less persistent, more turnover-intensive characteristics. The mean-variance-optimal tilts toward value, size, and profitability are roughly equal to each other and to the optimal low-beta tilt. Notably, the low-beta tilt is not subsumed by the other three.