A Mid-Year Factor Focus

Aug 9, 2022

Inflation at 40-year highs, rising rates, elevated volatility, and negative equity and bond market returns for the first half of 2022—how can we play defense yet also take advantage of the market environment to seek excess returns? Value and min vol strategies are made for these times, with value strategies historically outperforming growth in periods of high inflation, as evidenced by factor returns we analyzed going back to the 1920s.1 Min vol strategies have historically reduced market volatility by approximately 20% but have provided returns in line with the equity market over long economic cycles.2

In the Simpsons Movie, Homer Simpson is caught between a rock and a hard place—literally. Homer is stuck on a wrecking ball which swings repeatedly between a large rock and A Hard Place, a saloon that looks to be built out of wood but doesn’t budge an inch when Homer smashes into it.

Our whole family loves watching the Simpsons – now in its 33rd season and going strong since 1989! I do fear that my children are getting their first exposure to pop culture, high culture, and subculture through the Simpsons and not firsthand from visiting museums, travel, or watching shows. But what a show! I think that our economy today is in the position as poor Homer, caught between the rock of rising inflation and rising interest rates and the hard place of oncoming recession and poor returns in equity markets. At the end of the short scene, Homer escapes the rock and the hard place by being crushed beneath the falling wrecking ball.

Fortunately, factors can provide a way to help navigate the way so that we won’t be crushed between the rock and a hard place.

Finding value in value

One bright spot in a challenging market has been value. We’ve seen strong relative outperformance for this factor following a trend that started in 2021, as market sentiment and client interest shifted away from growth in favor of the value/cyclical trade. Value firms are often firms with large amounts of physical capital, such as traditional brick and mortars, established hotel chains, and airliners. These types of companies come to mind because they benefit from the restarting of an in-person, physical economy with physical interactions.

We’ve seen value previously do well in the reopening trade following “Pfizer Day” on November 9, 2020, with the announcement of the first effective vaccine against covid-19 allowing the world to return to a post-COVID normal interactions. We saw value outperform the S&P 500 by almost 20% during the Pfizer rally, outpacing its growth counterpart by over 27% during that same time frame. We believe there is additional upside for value despite its recent outperformance vs. growth, since valuations continue to be attractive relative to growth by historical standards. The chart below shows valuations for the Russell 1000 Value relative to the Russell 1000 Growth remain deeply discounted – nearly 36% deeper than the long-term average premium/discount.

Exhibit 1: Relative Forward Valuation Premium/Discount of Value to Growth (FY2 P/E Est.)

Chart image shows the relative valuations of value vs. growth stocks throughout history. Currently, valuations for value stocks relative to growth stocks remain deeply discounted at nearly 26% deeper than the long-term average.

Source: FactSet as of 6/30/2022. Relative forward P/E premium/discount (%) shown for period 3/1993-6/2022. P/Es calculated using forward P/E ratios using the unreported fiscal year following the next unreported fiscal year as of each quarter-end over the period shown. “Value” represents the Russell 1000 Value Index and “Growth” represents the Russell 1000 Growth Index.

There is another side to value’s outperformance. Historically, value companies have tended to outperform growth companies during inflationary environments, as illustrated in the chart below. 

Exhibit 2: Value’s Historical Outperformance vs. Growth During Various Inflationary Periods

Chart shows outperformance of value stocks during inflationary periods. Historically, value companies have tended to outperform growth companies during periods where inflation is highest.

Source: BlackRock with data from Kenneth R.French Data Library and Robert J. Shiller. Data from 7/1926 to 4/2022. Data uses the CRSP universe which includes all companies incorporated in the U.S. and listed on the NYSE, AMEX or NASDAQ exchanges. Inflation determined by using YoY changes in CPI and breaking into quintiles. “Value outperformance” represents performance of value stocks minus growth stocks as defined by the Fama and French HML research factor (high book to price minus low book to price). Past performance does not guarantee future results.

Using data from almost a century of data from 1926 to 2022, the returns of value minus growth stocks have been highest during high inflation periods and the relationship of value outperformance vs. inflation regimes is increasing from low to high inflation periods.


Value stocks have historically generated earnings and cashflow today, as opposed to growth firms which tend to have their highest cashflows and earnings come in the future (and sometimes in the far future!). As inflation increases, rising interest rates and hawkish monetary policy tends to be more favorable for companies with shorter-dated cash flows compared to those with longer-dated cash flows. This is because higher discount rates tend to reduce the present value of future earnings more than current earnings—which means adversely affects growth companies priced on future earnings expectations. Value companies are generating earnings today, which are not as affected by the drop in present value with higher discount rates.

Seeking stability with minimum volatility

With elevated volatility, increased geopolitical conflict, and the risk-off environment we’ve seen so far in 2022, we have shifted to defense in many of our portfolios. The key benefit of minimum volatility strategies is their lower volatility characteristics which in turn can help provide investors’ confidence to maintain their equity allocations when times get turbulent. If we look at monthly returns over rolling 3-year periods, the MSCI USA Minimum Volatility Index has experienced, on average, 22% less volatility than the S&P 500.4

We also favor minimum volatility strategies today for downside resiliency, because minimum volatility has tended to lose less during down markets while capturing a meaningful portion of the upside as markets rally.5 However, many investors don’t think of market turmoil in terms of up/down capture or rolling period analysis. Rather, many view challenging market environments in the form of well-known market shocks or events including those ranging from over a few years to only a few months. Over both longer and shorter periods of market turmoil, minimum volatility exhibited considerably lower downside capture relative to the market, emphasizing what the property of downside resilience can mean for investors in declining markets!

Exhibit 3: MSCI USA Minimum Volatility Performance versus the S&P 500 during Market Shocks

Market Shocks (start date - end date)

Minimum Volatility

S&P 500


Financial Crisis & Recession (Sep 2008 - Jun 2009)




Euro Debt Crisis (Oct 2010 - Nov 2011)




US Debt Downgrade (Jul 2011 - Sept 2011)




Fed Tapering (May 21 2013 - Jun 24 2013)




China Market Crash (Jun 12 2015 - Aug 26 2015)




Global Equities Sell-Off (Jan 2016 - Feb 2016)




Volatility Spike (Feb 2018 - Mar 2018)




Equities Sell-Off (Oct 2018 - Dec 2018)




COVID Sell-Off (Feb 19 2020 - Mar 23 2020)




War in Ukraine (Feb 24 2022 - Present)




Source: BlackRock, Morningstar Direct as of 6/30/2022. Based on index returns of the MSCI USA Minimum Volatility Index (“Minimum Volatility”) and S&P 500 Index. Returns for periods longer than 1 year are annualized. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

The S&P 500 declined nearly -20% in the first half of 2022.6 Through this drawdown in US equities, the MSCI USA Minimum Volatility Index has outperformed the S&P 500 by over 7% and experienced significantly less volatility.7 For investors, minimum volatility has proven to be a useful tool to effectively weather the downturn while maintaining allocation to US equities.

Exhibit 4: MSCI USA Minimum Volatility Index vs. S&P 500 Risk and Return Comparison YTD 2022

Chart shows the return and standard deviation of the MSCI USA Minimum Volatility Index vs. the S&P 500 Index. So far in 2022, minimum volatility has had better returns and lower risk.

Source: Morningstar Direct as of 6/30/2022. Chart displays cumulative total returns and annualized risk (standard deviation) over the year-to-date period (1/1/2022-6/30/2022) for the MSCI USA Minimum Volatility Index (“minimum volatility”) vs. the relevant equity market benchmark (S&P 500 Index). Annualized risk (standard deviation) computed using daily total returns. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Min vol can be a ballast to value when paired together

Although the Simpsons are 33 years old, the characters never age: baby Maggie has never spoken a word, Bart and Lisa are always students at Springfield Elementary, and Homer still says, “D’oh.” We can’t let our portfolios, however, remain untouched.

With the horrible start to 2022, value and min vol strategies could be important pivots for investors. Value stocks have historically outperformed during high inflation and rising rate environments. And there may still be room to run with a potential “reopening trade.” Min vol strategies help investors stay the course by reducing portfolio volatility. In addition, barbelling value exposure with a more defensive factor like minimum volatility may also help investors achieve greater diversification benefits because since their inception, VLUE and USMV have had negative excess return correlations of -25%.8

The Simpson's has been on the air for 33 years and revolutionized the animated medium for television. Similarly, factor strategies have been around for decades and have now revolutionized traditional approaches to investing. The practicality of tilting into stocks at lower levels of volatility or stocks at lower valuations in today’s market environment can be appreciated for the same reasons the Simpsons have captivated millions of viewers over 30+ years – simplistic brilliance.

Andrew Ang, PhD
Andrew Ang, PhD
Head of Factors, Sustainable and Solutions for BlackRock Systematic
Andrew Ang, PhD, Managing Director, is Head of Factors, Sustainable and Solutions for BlackRock Systematic. He also serves as Senior Advisor to BlackRock Retirement ...
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