BofA: Value Investing Will Only Grow More Popular

BofA: Value Investing Will Only Grow More Popular

The growth of smart beta, as it is generally known, has been reasonably remarkable, achieving a 30% annualized run rate during the current bull market, a Bank of America Merrill Lynch report notes. But what is the next “big thing” to hit what Morningstar refers to as “strategic beta?” According to a survey of its institutional clients, BofA thinks value investing, the popular kid at the lunchroom table last year, will only grow more popular, which might make Ben Graham smile, but would not be great for investors.

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

We respect your email privacy

Timeless Reading eBook
value investing strategies are hot

Value investing is extending its lead

When Savita Subramanian and his Equity and Quant Strategy team at BofA look at the results of their 26th annual client survey, they see decided trends. The concept of factor investing, which underpins much of the smart beta movement, is a concept that “matters to everyone, not just quants,” they say. Had they made that statement to the average discretionary value manager ten years ago, they might have been ignored or told to sit in a corner and play with their pocket protector. Times have changed.

“Even if you don’t wear a pocket protector” there has been “what feels like a seismic shift in assets from fundamental to systematic strategies,” the report said, noting a shift from active to passive that represented a fivefold increase in assets under management for smart beta over eight years.

It might seem odd for quants such as Subramanian and his team of noted researchers to rely on “feel” when telling a statistical story, as their survey uncovers statistical trends more completely.

When Value factors overtook both Dividend Yield and Growth as the most popular factor in 2016 based on the statistical survey, Value investing trend extended its lead in the 2017 survey, with Subramanian and his team speculating “this could continue.”

value investing

value investing - Factor growth is a key to smart beta investing

While Value is the larger overall theme, inside that the forward Price / Earnings ratio is the most popular factor, used by 80% of those surveyed.

“While cash-flow based valuation measures were more popular pre-crisis, Forward P/E has topped the list every year since the crisis,” the report said, noting that Enterprise Value relative to Earnings (EBITDA) was the second most cited factor. Like many cycles in investing, those trailing the popularity list, Artificial Intelligence, Text Based Algorithms and Machine Learning, are the presumed up and coming methods that have garnered much talk but, to date, not as much practical adoption among investors where the audited returns are available to the public.

While different factors remain popular, the number of factors used in smart beta investing has nearly doubled over the past 8 years, with investors moving from 10 to topping out at nearly 20 factors in 2015, but then moderating to 16 factors on average in 2016 with 17 factors being used in 2017.

The factor experiencing the single biggest jump in usage among survey respondents relative to last year was text-based algorithms, a method also used by high frequency trading firms to algorithmically evaluate press releases, sell side research, and other large data sets to identify a trend pattern. “While this factor was still the third least popular of all factors listed on our survey, it improved from last place in both 2016 and 2015, and was used by 10% of respondents this year vs. just 1% in 2016,” the report noted.

But it is not just factors that see increased use, the portfolio management task is increasingly taking an algorithmic tone:

Just over half of respondents indicated that they optimize their portfolios, a reversal from last year when only 39% cited using optimization. In-house optimization models were most popular with 34% of respondents, vs. 17% using optimization platforms from external vendors. A lower use of optimization in prior years may have been in response to the 2007 quant crisis, during which some theorize similar optimization techniques drove more similarity between portfolios than alpha factor models, but more may be returning to this technique as we have moved further from the crisis and quantitative investing has grown in popularity.

As certain alpha signals tend to be more commonly used, some say effectiveness can wane, particularly in less liquid markets, a point of contention. The tactic of share buybacks, which at one point were a popular factor to monitor for potential stock price moves, witnessed the biggest reduction in popularity from 2016 to 2017.

The post BofA: Value Investing Will Only Grow More Popular appeared first on ValueWalk.