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January 19, 2024

A Tale of Two Equity Factors: Value and Momentum


In the relentless quest to outperform the market-cap-weighted index, the investment world has seen the evolution of numerous strategies over time.

Central to many of these strategies are 'factors', systematic metrics that empirical research has identified as contributors to long-term equity returns.

For example, researchers have identified several key factors: value, size, momentum, low volatility, dividend yield, and quality.

 Each of these factors represent a different approach to stock selection and portfolio construction, playing a unique role in the investment landscape.

Among these diverse factors, few are as contrasted as value and momentum. Each of these investment styles sits on opposite ends of the factor style spectrum, offering distinct historical benefits to portfolios.

While value investing focuses on stocks that are undervalued compared to their intrinsic worth, momentum investing capitalizes on the tendency of securities to continue moving in the same direction.

Both strategies have their own merits and challenges, and understanding their dynamics can be crucial for investors looking to diversify their approach to U.S. equity investing.

Here's what you need to know about these two pivotal factors in equity investing - value and momentum.

What is the value factor?

Warren Buffett and Benjamin Graham's school of value investing. This approach revolves around finding assets that are undervalued relative to their intrinsic value, coupled with a significant margin of safety.

It’s about identifying stocks that are trading for less than what they’re fundamentally worth, based on an analysis of their financial statements and market prospects. Over time, research shows that this approach can result in outperformance.

Bar graph illustrating Enhanced Returns Through Factor Investing
Source: Morningstar Direct. As of November 30, 2023. Performance in Base currency.

However, while the idea of value investing sounds straightforward, it can be quite time-consuming in practice. Traditional value investing involves a deep, focused analysis of individual securities, requiring extensive research to uncover hidden gems the market has overlooked.

In the realm of modern portfolio management, the value factor can still be accessed, but in a more systematic and broad-based manner.

Here, the objective shifts to identifying a wider range of stocks that are potentially undervalued, using various quantitative metrics that have demonstrated strong explanatory power in assessing a stock’s value.

For example, a value index methodology may employ the following three ratios to identify stocks that may represent value:

  1. Forward Price to Earnings (Fwd P/E): This ratio compares the stock’s current price to its expected earnings, offering insights into whether a stock is undervalued relative to its future earnings potential.
  2. Enterprise Value/Operating Cash Flows (EV/CFO): This metric assesses a company's total valuation (including debt and excluding cash) relative to its cash flow from operations. It helps identify companies that are generating significant cash relative to their total value.
  3. Price to Book Value (P/B): This ratio compares the stock’s market value to its book value, identifying stocks that may be undervalued in terms of their assets.

By employing screeners such as the above, investors can systematically tilt their security selection towards value-oriented stocks. This simplifies the process of value investing, making it more accessible to a broader range of investors who may not have the time or resources to conduct deep individual stock analysis.

What is the momentum factor?

If value investing can be likened to bargain-hunting, then the momentum factor in investing is akin to focusing on the winners in the hope that their success streak continues.

This investment approach is well-summarized by famous investor Peter Lynch: "Selling your winners and holding your losers is like cutting the flowers and watering the weeds."

This maxim captures the essence of a momentum strategy – it’s about riding the wave of current market winners and having sell discipline with the losers.

The core idea of momentum investing is to buy stocks that have shown strong performance and to sell those that have underperformed. This might seem counterintuitive at first glance – after all, conventional wisdom might suggest buying low and selling high. But historically, a momentum strategy has worked out well for investors.

Bar graph illustrating Enhanced Returns Through Factor InvestingSource: Morningstar Direct. As of November 30, 2023. Performance in Base currency.

Momentum investing is rooted in the recognition of trends and distinct market cycles. It operates on the principle that securities which have performed well in the recent past tend to continue performing well in the short to medium term, and vice versa.

Research and empirical evidence support the efficacy of the momentum strategy. There are several reasons why momentum exists and can lead to outperformance:

  1. Behavioral Economics: Investor behavior plays a significant role. The reluctance to sell a loser and the eagerness to ride a winning trend can create and sustain momentum in stock prices.
  2. Market Reaction: Markets can be slow to fully respond to new information. As a result, the price adjustment process can create momentum.
  3. Risk Compensation: Momentum might also be viewed as a risk factor. Stocks with high momentum might be riskier, and thus their higher returns could be a compensation for this additional risk.

Momentum investing, thus, relies on the continuation of existing trends in the market. It’s a strategy that can be particularly effective in certain market conditions, especially in times of strong trends or when investor sentiment is driving market movements.

Like value investing, momentum can be applied in a diversified manner through indexes and rules-based funds that focus on momentum strategies, allowing investors to incorporate this factor into their portfolios without the need for constant, individual stock monitoring.

An enhanced approach to value and momentum factor investing

Executing a successful investment strategy in the realm of value and momentum factor investing hinges on a disciplined, rules-based methodology. This approach enables investors to systematically capture exposure to these key factors while limiting idiosyncratic risks that can accompany individual stock investments.

CI U.S. Enhanced Value Index ETF (CVLU / CVLU.B) exemplifies this approach in the value investing domain. It tracks the VettaFi US Enhanced Value Index, a carefully constructed index that selects its constituents from a universe of stocks.

The selection process is based on a blend of both current and forward-looking metrics, encompassing price to book, price to earnings, price to sales, dividend yield, and forward free cash flow. These metrics are combined to create a composite score, which forms the basis for the fundamental weighting of the constituents in the ETF.

To ensure a diversified portfolio, the index applies caps on single stocks and sectors, and undergoes a semi-annual rebalancing. This practice helps maintain a balanced exposure and mitigates the risk of overconcentration in any one stock or sector.

Graphic illustrating how a balanced exposure and mitigates the risk of overconcentration in any one stock or sector

The ETF charges a management fee of just 0.30% and is available in both hedged (CVLU) and unhedged (CVLU.B) variants, catering to different investor preferences regarding U.S. currency exposure.

Turning to momentum, the CI U.S. Enhanced Momentum Index ETF (CMOM / CMOM.B) offers a strategic approach to this factor. This ETF tracks the VettaFi US Enhanced Momentum Index, which incorporates a quality screen alongside its momentum criteria.

Sifting out lower-quality stocks is crucial in momentum investing, as it focuses on companies that not only show strong price momentum but also demonstrate sound financial health.

The index calculates scores based on a weighted mix: 60% risk-adjusted time-weighted price momentum, 20% earnings momentum, and 20% quality.

Graphic illustrating how a balanced exposure and mitigates the risk of overconcentration in any one stock or sector

This blend ensures that the ETF is not just chasing high-flyers but is investing in companies with sustainable momentum backed by solid fundamentals.

Similar to its value counterpart, the momentum index also applies sector and stock caps and undergoes more frequent quarterly rebalancing. This ensures that the ETF maintains consistent exposure to momentum stocks and quickly adapts to changes in market dynamics.

The ETF also comes with a management fee of 0.30% and is available in both hedged (CMOM) and unhedged (CMOM.B) currency variants.

About the Author

Jaron Liu

Jaron Liu

Director, ETF Strategy
CI Global Asset Management

Jaron Liu is a Director of ETF Strategy at CI GAM and is responsible for growing the ETF business by setting and executing the ETF sales strategy as well as supporting the ETF sales team. Prior to joining CI GAM, Jaron worked as an analyst within product management for one of the largest global asset managers where he focused on ETFs. Jaron graduated from the University of Waterloo with a degree in Honours Economics and is a CFA charter holder.


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