Last year was among the worst for so-called value stocks based on data going back to 1925, according to Andrew Ang, director of BlackRock Inc’s $210 billion factor strategies group and this week’s guest on Masters in Business. But here’s the key: holding value stocks during short periods of poor performance is the secret to longer-term outperformance versus growth stocks.
Ang, a former finance professor at Columbia Business School and author of Asset Management: A Systematic Approach to Factor Investing believes that this behavioural element is what underlies the value component of factor investing. Despite the well-documented long-term advantages of value over growth, institutional managers suffer from career risk when it comes time to do nothing and ride out the decline. Counter-intuitively, professionals must give up alpha (market outperformance) if they want to hold on to their jobs.
That and other insights from Ang’s 15 years teaching at Columbia is why he consulted for a variety of large institutions, including the $1 trillion Norway sovereign wealth fund.
In our wide-ranging conversation, Ang explained why factor investing is a way to manage risk and enhance returns. Building on the classic Fama-French three-factor model (size, value and market risk), Ang focuses on five specific factors: value, size, quality, volatility and momentum. He also sees areas beyond equities as being subject to factor analysis, including fixed income, commodities and currencies. He believes the application of data and technology leads to scale and lower costs.
He also points out that individual factors are themselves subject to factors — “meta-factors” — that value at times can become cheaper or more expensive (e.g., relative to its own history), and that there can be momentum to momentum (e.g., relative strength).
• Barry Ritholtz is a Bloomberg Opinion columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He is the author of “Bailout Nation.”