BlackRock’s Factor Guru Favors Momentum Stocks
By John Kimelman
For decades, the most important F word in investing was “fundamentals.” But as the industry transitions away from active stock-picking by humans to more mechanized approaches, a new F word has emerged: “factors.”
In factor investing, securities are chosen by computer systems based on attributes, or factors, that are associated with higher returns. Value and quality are factors, but so are momentum and low volatility.
As Barron’s pointed out in an article this summer, about a third of all exchange-traded funds now are based on factors, and nearly two-thirds of these ETFs have been launched in the past five years alone.
A variety of financial-services firms—including BlackRock, Pimco, Goldman Sachs, and Invesco—offer factor funds to their clients. Barrons.com recently interviewed Andrew Ang, 45, head of factor-investing strategies at BlackRock, about this style of investing and his favorite factors.
Barrons.com: The term “factor investing” sounds like it was dreamed up by a mathematician or a statistician rather than someone marketing these things to the average retail investor. How would you explain it to a nonprofessional?
Ang: We describe factors as broad and persistent sources of returns. With each factor, you can see the same return patterns across thousands of different stocks, and in different asset classes like equities, fixed income, and beyond. They include very intuitive investment styles that have long been used by active managers, such as value investing, which is finding cheap securities; momentum investing, which seems to identify and participate in trends; quality investing, which is finding stocks with more-stable earnings; low volatility, which gravitates to safety; and small size, where you find smaller or more-nimble companies.
All of these have long been used by traditional active managers, and I think they are familiar to many. What’s changed today is the ability to focus directly on those sources of return and efficiently execute them across thousands of stocks and place them in very efficient, tax-efficient, and transparent low-cost vehicles like ETFs.
Q: I understand you don’t believe in market-timing in and out of factors, but you do believe in tilting toward and away from various factors. What factors at BlackRock are you overweighting, and which ones are you underweighting, right now?
A: You start with a well-diversified, multifactor combination and then rotate among those factors as you go through the economic cycle. Our biggest theme is that we are overweight momentum. Momentum has momentum itself now. It has high relative strength. We are neutral with respect to quality, value, and minimum volatility, and then we are underweight small size, which is due to our lower expectations for economic growth.
Q: What are some stocks that are helping lift momentum right now?
A: Looking at momentum’s performance year to date, the FAANG internet leaders have fueled the rally most recently. The financial sector makes up around one-quarter of the momentum index, and the recent performance of diversified banks such as Bank of America (ticker: BAC) and JPMorgan Chase (JPM) has also boosted results.
Q: Is it normal that momentum would be a good place to be at this point in the economic cycle? How long has BlackRock overweighted momentum?
A: Factors tend to perform differently in each phase of the economic cycle, so diversified exposure across factors is key over the long term. Over shorter periods of time, investors may tilt toward particular factors. The global economy is in expansion mode now, when growth is accelerating and trends persist, so we expect momentum and other risk-seeking factors to perform well. BlackRock has been tilted toward momentum since March.
Q: You say you are underweight small size because you have lower expectations for economic growth. What factors will get in the way of economic growth, and what gross-domestic-product growth rate are you forecasting?
A: While we see the level of growth as strong globally, and G-7 growth in particular at above-trend levels, the pace of growth appears to be moderating in the U.S. Small-size stocks tend to perform best in expansions, when investors are risk-seeking. So, relative to other style factors, we are underweight the small-size factor in the U.S. but moderately overweight small-size globally. BlackRock’s macro model currently implies future GDP growth of around 2% for the G-7 and 2.5% for the U.S.
Q: How does a retail investor partake of these factor tilts?
A: We publish a model portfolio, which we send out to various investors.
Q: Is there a multifactor fund I could buy that would basically embody those tilts?
A: Right now, they are just for institutions. They haven’t been rolled out for retail investors.
Q: I assume that you are eating some of your own cooking. What kind of factor funds are you personally invested in?
A: My personal ones are iShares Edge MSCI USA Momentum Factor ETF [MTUM) and the iShares Edge MSCI Minimum Volatility USA ETF (USMV), as well as the iShares Edge MSCI Minimum Volatility Emerging Markets ETF (EEMV).
Q: What’s a good way for investors to hold a mix of factors without tilting?
A: I would recommend the iShares Edge MSCI Multifactor USA ETF (LRGF), which represents a diversified combination of factors for equity investing. To be clear, it doesn’t do any active tilting.
Q: I see that you hold an emerging markets fund in your personal portfolio. Investors as diverse as Rob Arnott at Research Affiliates and Jeremy Grantham at GMO are bullish on emerging markets going forward, principally on valuation grounds. Do you agree with them, and how would you best use factor investing to play emerging markets?
A: Factors are very important in emerging markets, and we see the same patterns at work. Buying cheap, finding trends and high-quality names: These same patterns work in emerging markets.
Q: Thanks for your time.
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