Skip to content
Investment Actions

Is it time to tilt?

Dec 7, 2018
By Andrew Ang, Phd, Justin Peterson, Ked Hogan, PhD

Exploring a fundamental question in factor investing

While the long-run returns for style factors have historically been positive, they are inherently cyclical. Because individual factors are driven by different phenomena, they tend to outperform at different times.

Given this cyclicality, we think that an effective way for investors to capture factor returns is to diversify their exposure across multiple factors. However, cyclicality also raises the question of whether it is possible to time one’s exposures to different factors, in order to seek incremental returns above and beyond the long-run factor premia.

We believe that a form of factor timing, which is best described as factor tilting, is possible. Our methodology involves using four indicators: economic regime, valuation, relative strength and dispersion, and our research suggests that combining all four of these is more effective than using any of them in isolation.

The returns from factor tilting can be diversifying both to the returns from a diversified allocation to style factors and to the returns from many active equity strategies. The

widespread availability of factor ETFs makes implementation of a factor-tilting strategy relatively straightforward.

 

Andrew Ang, PhD
Head of Factor Investing Strategies
Read more
Ked Hogan, PhD
Head of Investments for BlackRock's Factor-Based Strategies Group
Justin Peterson
Researcher for BlackRock’s Factor-Based Strategies Group