Focusing on factors

01 jun 2017

Factors – broad, persistent characteristics driving returns – can potentially help investors increase diversification and enhance returns relative to broad market exposure. We use the U.S. market as an example to explore how this can be done.

Equity highlights

  • We advocate “tilting”, or adjusting exposure to various factors in a diversified multifactor portfolio. The economic regime is the biggest driver of factor performance, although combining this with other indicators such as relative strength, valuation and dispersion can produce better results, we find.
  • We prefer momentum (stocks trending higher) in today’s economic environment. We also see the value factor (the cheapest corners of the market) potentially performing well in coming quarters against a backdrop of stable cyclical expansion.
  • How investors define factors can lead to different outcomes. The cheapest quintile in the U.S. equity market is dominated by the financial sector, while technology has the highest weight in “sector-neutral” value indexes, for example.

The major equity style factors – value, quality, momentum, size and minimum volatility (min vol) – have behaved differently depending on the phase of the economic cycle. Investors have historically been best rewarded for exposure to the momentum factor during the phase of expansion – such as the one we are going through – our analysis of factor performance since 1990 suggests. We also see the value factor supported by the current environment. 

In and out of style
Economic regimes and equity style factor performance

Chart: Economic regimes and equity style factor performance

Sources: BlackRock Investment Institute and BlackRock’s Factor-based Strategies Group, May 2017.
Notes: This is for illustrative purposes only and does not represent any actual fund or strategy performance. We define each factor above and throughout this piece using the relevant MSCI indexes: The MSCI USA Momentum Index (momentum), MSCI USA Minimum Volatility Index (min vol), MSCI USA Risk Weighted Index (size), MSCI USA Sector Neutral Quality Index (quality) and MSCI Enhanced Value Index (value).


Kate Moore
Chief Equity Strategist
Kate Moore, Managing Director, is Chief Equity Strategist for BlackRock and a member of the BlackRock Investment Institute.
Andrew Ang, Ph.D.
Head of Factor Investor Strategies
Andrew Ang, PhD, Managing Director, is Head of Factor Investing Strategies and leads BlackRock’s Factor-Based Strategies Group. Throughout his career, Dr. Ang’s ...