In 2018, “Value” had the fourth worst drawdown in almost 100 years of data going back to 1925 (See Fama-French data set) according to Andrew Ang, director of BlackRock’s $210 billion dollar factor strategies group. He notes the challenge of holding value stocks during a short periods of poor performance is the secret to its longer-term outperformance over growth.
The former Professor of Finance at Columbia Business School and author of Asset Management: A Systematic Approach to Factor Investing believes that behavioral element is what underlies the value component of factor investing. Despite the well documented advantages of value over growth, institutional managers suffer from career risk when it comes time to do “nothing and ride out the drawdowns.” 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 trillion-dollar Norwegian Sovereign Wealth fund.
In our wide-ranging conversation, Ang explains why factor investing is a way to manage risk and enhance returns. Building on the classic Fama-Fench 3 factor model (size, value, and market risk), Ang focuses on 5 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).
You can stream/download the full conversation, including the podcast extras on Apple iTunes, Bloomberg, Spotify, Google Podcasts, Overcast, and Stitcher. All of our earlier podcasts on your favorite hosts can be found here.