Andrew’s Angle

Defining Factors

Feb 26, 2019

The capacity of factor strategies appears large 

I’m excited to share a series of conversations called Defining Factors, which identifies the “factors of success” behind every day concepts.

In Defining Factors, I sit down with Danny Meyer, CEO of Union Square Hospitality Group, to discuss the factors of success. In this clip, our conversation turns to my favorite factor, minimum volatility. You can view our full conversation and additional bonus clips here.

  • View transcript

    Danny: Is there one factor that you feel you’ve had even more success at as an investment criteria than any of the others?

    Andrew: The one that perhaps has a special affinity with me is from research that I did looking at the excess returns to stocks that have more stable returns. What’s called now the risk anomaly, or the minimum volatility effect. And that’s really been beneficial for so many investors who need to participate in the growth of stock markets but want to do so with less stomach-churning volatility.

    So they can stay the course for the long run. And I think that I played a small part in helping investors achieve their financial goal being by discovering that.

    Danny: Was that the first factor that you discovered yourself?

    Andrew: Well, there were others as well, but I think that factor has had the biggest effect on many investors’ portfolios.

Uncovering the components
of success

I’m a factor believer.

I’ve studied factors, I researched them, written over a hundred papers on the topic, and published a book on it. I nearly named my child after a factor – nearly

I believe in the power of factor investing to deliver outcomes in portfolios and consider it the future of investing. But everyone is not like me, and for some, factors are still a new concept. I want to change that. I want to help bring the topic to life. Factor investing is simply a set of fundamental attributes that influence investment performance, just as other practices depend on essential influences, such as service and excellent food in a good restaurant, a chord in music, or a well-executed play in sports. The way of viewing restaurants, music, and sports in terms of their underlying building blocks opens up new conversations, ways to improve our portfolios and understand what is really going on—and making sure we get the best possible outcomes for the lowest possible costs.

Through these entertaining, innovative and engaging discussions, I hope investors will see the parallels of these factors of success outside their portfolio, to develop a better understanding of the how factors drive results within their portfolio. Defining Factors, is intended to be a series of conversations I’ll have with masters of their craft, to uncover these hidden components of success.

Meeting Danny Meyer

The first video in the installment is with someone who I’ve admired for decades, Danny Meyer, the CEO of the Union Square Hospitality Group. Our discussion uncovered his secrets to success in starting and running successful restaurants like Shake Shack and Union Square Cafe. My family’s favorite restaurant, and where we eat out the most, is our neighborhood Shake Shack.

The first thing I noticed about Danny was his attention to detail. His engagement with his staff is unparalleled. He also makes sure that every salt shaker is positioned in the exact center of every table, which demonstrated his commitment to discipline in his business. He believes in a tried and true approach and never wavers from it.

So what did I learn?

What struck me as simplistic but brilliant is his approach to creating restaurants: 49% is service, how good did the food taste; and 51% is hospitality, how did he make customers feel. If you get both dimensions right, then your diners will come away with a fantastic experience. Investments is similar—it’s not enough to provide an investment product; we need to put the latest research, with factor data and analytics to help investors understand what drives their performance and where they should be held in their portfolios.

Playing favorites

One thing that came up in our conversation (captured in the video above) was around my favorite factor. It’s like picking your favorite kid, but if I had to choose, it would be minimum volatility. I first researched the minimum volatility factor in 2006 and it’s as relevant in today’s markets as it was when that paper kick started today’s literature on the low risk anomaly.

Since the publication of my paper, minimum volatility has become quite a popular strategy. At the end of 2018, as volatility spiked, minimum volatility ETFs saw record inflows and were the second largest asset gathering category in December, with $4.1 billion of inflows for the month alone. 1Today, minimum volatility has proven itself as an important factor that’s delivered lower risk to traditional equity markets and in times of turbulence, helping investors obtain more consistent returns.

Stay tuned for future Defining Factors conversations as we dive deeper into the factors of success in investing and beyond.

Andrew Ang
Head of Factor Investing Strategies
Andrew Ang, PhD, Managing Director, coordinates BlackRock’s efforts in factor investing. He leads BlackRock’s Factor-Based Strategies Group which manages macro ...