Factor investors including Cliff Asness at AQR Capital Management and Research Affiliates founder Rob Arnott have declared that it is time for investors to start buying more value stocks. At BlackRock, however, managing director Andrew Ang is urging caution.
Ang, who heads BlackRock’s $244 billion in factor-based investments, suggested that some big investors are making a call to buy into the value factor simply because it appears inexpensive. The factor, which offers exposure to stocks seen as undervalued relative to the rest of the market, has recently experienced some of its worst underperformance of all time, causing some, like Asness, to view it as “really, really cheap.”
Although BlackRock recently increased its value exposure from underweight to neutral, Ang stressed that he isn’t going to overreact or allow human biases to overrule the rules of his investment model.
“Human behavior may cause us to foolishly get too excited about this,” Ang said during an interview in his New York office. “We all want to believe it’s time for value again, but our model says to be more cautious — we have increased our weight to value, but we don’t want to be massively overweight. BlackRock is trying to protect against the human behavior that’s causing some of the premium in the first place.”
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Factors — like value, momentum, and growth — are characteristics of securities that have been identified as persistent drivers of returns over long periods of time. Over the last two and half years, the value factor has experienced its fourth worst drawdown of the last century, according to Ang. The biggest drawdown was in the late 1990s during the run-up in technology stocks.
Given value stocks’ long period of underperformance, investors are starting to get a lot of advice about whether they should increase their value investments or shun the category altogether. Some researchers have argued that the value strategy has underperformed for longer than commonly believed — and that it’s unlikely to bounce back. Meanwhile, investors like Arnott and his colleagues at Research Affiliates have argued that “now is the time to increase allocations to value strategies.”
As head of BlackRock’s factor investments, Ang said he only builds strategies around premiums that have an underlying economic rationale. Value stocks, for example, tend to underperform in the late stages of an economic cycle, because those companies tend have a lot of fixed capital such as machinery that makes the companies inflexible when it comes to adjusting to an economic slowdown or shift. The value premium, in fact, compensates investors for this short-term risk. Given that the bull market is 10 years old, Ang said he tries to be measured in how much he’ll tilt toward value stocks in the portfolios he oversees.
The former Columbia Business School professor is responsible for rotating factors in BlackRock’s U.S. Equity Factor Rotation ETF, as well as other portfolios. Earlier this year, he was significantly underweight value. Now the model has a more neutral position.
Although the economic cycle is arguably in the later stages, Ang stressed that his positions have also been influenced by the gap between value and other stocks.
“There is a large difference currently between the value of value stocks and the expensive stocks. That has caused us, despite where we are in the economic cycle, to move to a higher weight in value,” he said.
Although some investors have “capitulated” in the wake of the value factor’s decade-long underperformance, Ang argued that investors shouldn’t give up on value.
“There is a lot of style drift among value managers and they haven’t all experienced the same gains,” he said. “I think there is risk in being short value, so the risk of not holding any value in a portfolio is significant at this time, but let’s be precise about how we tilt back into the factor. Because value has performed so poorly, many have removed value entirely or changed their style.”