Value and Momentum Factor | Barita Insights | September 6, 2021

Analyst Insights

Value and Momentum Factor

The question many active investors inclusive of money managers typically ask themselves when constructing their portfolio is, what drives returns? In the case of individual stocks, what factors should I look for within my purchases? Factors are thus essentially broad and persistent drivers of growth across asset classes. These factors can broadly be defined as Macro and style factors. Macro Factors primarily revolve around key economic variables such as global interest rates, inflation, global liquidity, political and sovereign risks to name a few. Style factors on the other hand attempt to capture characteristics that drive asset returns within specific asset classes and can be subdivided traditionally into, Value, Size, Momentum, Quality and Volatility. In this piece we focus primarily on looking at the Value and Momentum style factors.

Value Factor

The value factor aims to capture excess returns by selecting assets that currently have low prices relative to their fundamental value. Variables that might be analyzed to determine whether there is relative value in a security includes book-to-price, earnings-to-price, book value, cash earnings, net profits, cashflow etc. Such a strategy might involve ranking stocks based on one of the above value variables and then selecting to invest into the stocks that rank within the top 5 or 10% of the investment universe for example. However, selecting stocks based on a single value factor might negatively impact returns particularly if the company in question for e.g. looks good based on one factor but rated poorly on several others. For example, a company can trade at a lower Price-to-book which would make them attractive however this might be reflective of poor operating performance which might had been indicated by other value metrics such as a poor forward price- to-earnings ratio. Hence combining value factors is a strategy that is often done and recommended. In summary the concept behind the value factor is the belief that cheaply priced(i.e trading at lower multiples of earnings or book) assets tend to outperform richly valued ones (trading at higher multiples) in the long run.


This factor reflects searching for excess returns in securities that have shown stronger past return performance. This factor is usually captured by variables such as past 3-month, 6-month returns or common momentum indicators such as simple moving averages, exponential moving averages, or relative strength indices. Popular momentum funds such as the Ishares USA momentum exchange traded fund (ETF) construct momentum strategies by selecting securities that have shown outperformance on a risk adjusted basis over the past 6 or 12 months The history of momentum strategies started from as far back as 1993 when Jagadeesh and Titman (1993) noted that an investor could generate excess returns by selling losers and buying winners. MSCI, a finance company that provides market indices have noted that on an historical basis, the momentum factor has been one of the strongest generators of excess returns, particularly in a macro environment characterized by a long cycle (either up or down) in the underlying market. They however noted that this factor was prone to crashes as cycles reversed.

Historical Performance

It is important to note that no factor performs the best under all market scenarios. The last 5-years has been characterized by a strong underperformance of value relative to the other factors .For 2020 based on MSCI Data, Momentum has shown the strongest performance of all factors with a return of 28.7% compared to the 1.0% for Value. MSCI notes that the momentum factor shows a high level of persistence, with positive returns over both moderate decline and increases. The value factor has been recognized as being Pro-cyclical showing greater performance during economic recoveries and peaks while underperforming relative to the other factors in economic downturns.


The value factor is relatively popular. Individual investors can utilize financial information provided by listed entities to compute metrics such as price-to-earnings ratios, price-to-book values and compare this to their counterparts in the same sector or the market to determine whether a particular security is a bargain or not based on the specific factor. The investor might also use multiple factors from which to combine and make their selection. A lot of the recommendations from several local brokerages are linked to valuations done on fundamental factors. Recommendations are then given based on the calculated discount based on the trading price of securities; hence an investor canappropriately capture some exposure to the value factor by following some of the recommendations given by their broker (i.e Barita’s weekly playbook). In terms of the momentum factor, we would recommend that if an investor wants to incorporate some form of momentum strategy in his portfolio that it be combined with other factors such as the value factor highlighted here.

For individuals with access to the foreign markets there also exists several ways to gain exposure to both value and momentum factor investing. This includes investing into factor-based funds or ETF that have these factor focus. Common examples include iShares MSCI Equity USA Value Factor ETF (22.30% YTD Returns) and the iShares MSCI Equity USA Momentum Factor ETF (13.59% YTD Returns).


Written by Peter-George Simon, Senior Investment Strategy Analyst


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