MARKT & ECONOMIE - FOR PROFESSIONAL INVESTORS

Focusing on factors

01/jun/2017
By Kate Moore

 

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

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).

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Factor disclosures: Index returns are for illustrative purposes only and do not represent any actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Data for time periods prior to the index inception date is hypothetical and is provided for informational purposes only to indicate historical performance had the index been available over the relevant time period. Hypothetical data results are based on criteria applied retroactively with the benefit of hindsight and knowledge of factors that may have positively affected its performance, and cannot account for risk factors that may affect the actual fund performance. The actual performance of the strategy or fund may vary significantly from the hypothetical index performance due to transaction costs, liquidity or other market factors. Index methodology available upon request. 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