Factor Commentary

How to harness
value strategies

10 mar 2017 / por Andrew Ang

Value investing is about finding bargains — companies with low prices relative to their true potential — and investors have been practicing it for centuries.

In 1776, Sebastiaan van Nooten, the manager of one of the earliest mutual funds, looked for “solid securities… [which] could be purchased below their intrinsic values, (…) of which one has every reason to expect an important benefit.”1 The first academic study of value strategies was written in 1934 by Professors Benjamin Graham and David Dodd at Columbia Business School2. Today, their book is still the seminal reference for most active value managers.

Over the long run, companies with low prices relative to fundamentals have tended to out-perform the market. This makes value an investment factor — a broad, historically rewarded driver of returns.

As with all investment factors, there are important considerations when incorporating the exposure into a broader portfolio:

  • Measurement matters: While we can observe market prices for traded stocks, intrinsic value must be estimated, and the measures that are used matter.
  • Diversification helps reduce cyclicality risk: Value strategies are cyclical, and will have periods of underperformance. Holding complementary factor exposures, especially momentum with value strategies, may offer diversification benefits.

Finally, a new wave of style indexes offers enhanced opportunities for implementing this popular tilt, which has historically been sought through active management, at a potentially lower cost. The factor weighting and more concentrated positioning of style factor indexes offer stronger exposure to the value factor than market cap weighted alternatives.

Andrew Ang, PhD
Head of BlackRock’s Factor Based Strategies Group and author of Asset Management: A Systematic Approach to Factor Investing
Smart Beta Senior Strategist, BlackRock