“We have an equity market which is better diversified, which is less concentrated in a few names,” said Bruno Taillardat, head of smart beta and factor investing at Amundi SA, who helps oversee 29 billion euros ($29 billion). “Dispersion for us is opportunity.”
These managers are also typically more exposed than other types of investors to a value strategy, which is now up 48% from a 2020 trough, a Dow Jones market-neutral index shows. As rates climb, shares with lower multiples are looking like they have less room to fall. Energy companies -- typically favored by long-only value funds -- have also been inflationary markets’ biggest winners.
With the S&P 500 down 18% this year, the momentum trade -- buying recent winners and selling losers -- has been piggybacking on value’s outperformance after rotating into winning cheap names like Exxon Mobil Corp. Price moves for both factors, which have been swinging in opposite directions for most of the past two decades, are now trading near the tightest positive link in data going back to 2002.
Meanwhile, the strategy of buying the least-volatile stocks is also mounting a comeback as a refuge from the equity storm, with a market-neutral index for the trade set for the best year since 2018. It means value and low volatility are at the highest correlation since 2006.
The elevated level of co-movement suggests a risk these factors could fall together if there’s another market regime shift. Mark Diver, a strategist at Sanford C. Bernstein, warns that cheap stocks typically underperform in a recession, which is looking increasingly likely. The firm now recommends a more defensive version of the value trade, such as buying stocks with high dividends and free-cash-flow yields.
At PGIM Quantitative Solutions, which manages $91.5 billion, head of quantitative equity Stacie Mintz says the firm’s stock funds now have a lower value tilt after the factor’s epic rebound. Yet she remains optimistic about an extended recovery -- given cheap shares are still trading near the widest discount ever to growth peers.
“There’s still a long way to go,” she said.
This article was provided by Bloomberg News.