Factors like minimum volatility, value and momentum have historically enhanced portfolio returns over time. But what explains their durability? Andrew Ang, Head of Factor Investing Strategies, answers.
The factors have been with us for many decades and we believe they are compelling investment thesis for decades to come. They are based on an economic rationale, a combination of a reward for risk, a structural impediment and a behavioral bias.
The reward for risk means that certain factors are going to do better or worse at different points in the economic cycle. And structural impediments result from certain investors not being able to take on the full spectrum of investments leaving opportunities for those who can. The behavioral bias leads certain investors to over-extrapolate and chase certain types of stocks leaving other types of stocks with low prices and high returns.