Q4 Factor Outlook

BlackRock |Jan 31, 2021

The Factor Outlook reviews the past quarter’s performance for five equity style factors and summarizes our factor views for the coming quarter. Versions of the Outlook are available with views on both U.S. and global style factors.

Factors are broad, persistent drivers of return. Factor investing targets intuitive investment styles and seeks to take advantage of economic insight, diversification and efficient execution.

As key equity style factors, quality refers to financially healthy firms, momentum indicates stocks with strong performance trends, value refers to stocks inexpensive relative to their fundamentals, size indicates smaller, high-growth companies and minimum volatility identifies historically stable, lower-risk stocks.

Because these factors are driven by different economic rationales, they have tended to outperform at different times. This cyclicality presents an opportunity to tilt portfolios toward some factors and away from others in pursuit of incremental returns.

Factor tilting, not timing

Our philosophy proposes complementing a core portfolio that’s diversified across multiple rewarded factors with opportunistic tilts to individual factors with the goal of improving a portfolio’s expected risk and return profile. Doing this will seek to capture two diversified sources of returns, one from a long-term static exposure to rewarded factors, and another from factor tilting.

To determine which factors we tilt in and out of, we have identified predictors that may contribute to the forward-looking performance of individual factors.

Four tilting predictors

We start by assessing the economic regime to determine which factors may be helped or hindered by the current environment. We then examine the valuation, relative strength and dispersion of each factor.

Economic regime considers whether a factor tends to do well in the current phase of the business cycle. Valuation measures a factor’s richness or cheapness compared to its own history. Relative strength asks whether a factor has a supportive performance trend. Dispersion measures how robust the opportunity set is for a factor.

Our factor tilting views—underweight, neutral or overweight—are relative to a hypothetical portfolio constructed with equal risk weights across five equity factor indices.

Q4 2020 Global Factor Outlook

Explore our experts' views on global factors.