Talk Your Book: The Case for Value and Momentum

Ben Carlson (0:00)

Today's Animal Spirits, Talk, Your Book, is brought to you by Victory Capital. Go to vcm.com to learn more about the case for value momentum strategies. It's vcm.com.

SPEAKER_2 (0:11)

Welcome to Animal Spirits, a show about markets, life and investing. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

Ben Carlson (0:41)

Welcome to Animal Spirits with Michael and Ben. Michael, quants, I think are very picky at times about their strategies and if they feel like there is a strategy that's not hitting everything that they want, all of their variables, they can be a little nitpicky about these things.

Michael Batnick (0:56)

They can be totally bitchy.

Ben Carlson (0:57)

Yeah, like I can't believe you're using this for value and this is, you know. But it's interesting because I think there's certain times, there's obviously certain times where certain factors work better than others, right? There's a million different factors, right? Value, quality, low vol, high vol, momentum, all these different things.

But there are times when you kind of Frankenstein these things and put them together because one is an offset. There are times, and I think this year is one of those times where actually combining things is probably working pretty well for investors.

So on today's show, we talked to Lance Humphrey. Lance is the head of portfolio management for Victory Shares and Solutions, Victory Capital, and they have this suite of valued momentum products. And we've been talking all year about how the fundamentals have been so strong in the market that it's actually pushed valuations down. But for certain companies like the ones that are doing the best, right, all these semiconductor companies, their earnings growth is so strong, they're becoming value stocks. They're in the growth portfolios, they're in the value portfolios, they're in the momentum portfolios. So it's strategies like this, it's kind of a perfect environment for that kind of thing. We have this massive, massive earnings growth. It's interesting. Anyway, we talked to Lance today about that, about some red flags for quantitative strategies, why value and momentum tend to work better together as opposed to separately. So here's our talk with Lance Humphrey from Victory Capital.

Michael Batnick (2:20)

Lance, good to see you again. Welcome back.

Lance Humphrey (2:22)

Hey, Michael. Great to be here.

Michael Batnick (2:24)

All right. We're talking about Victory Capital suite of momentum and value ETFs. I've never asked the question this way. So let me start here. Both momentum and value, like every other strategy, have their own different things that we don't love about it, that could be improved by complementing one another. So with value, I don't know, still relatively expensive, but whatever. Substitute any company that's just going down to the right. I think intuitively, not intuitively, it's the wrong word. People think that something that's gone down a lot is value stock. Not necessarily.

It still may be overvalued. Problem with momentum is if you're not careful, you might get caught up in a stock that is moving up for the wrong reasons. Maybe there's no substance behind the actual business.

So are we incorporating value into momentum to make sure that we're not owning crappy momentum stocks where there's no business fundamentals behind it? Or are we incorporating momentum into value to make sure that we're not writing a piece of crap value stock to zero?

Lance Humphrey (3:25)

That's an amazing question and I probably couldn't have said it better myself, but really the answer to both is to your question on why we do it this way. Really, the reason these products were built was because I myself am an allocator, where I run our firm's target date and target risk products. I've been a user of ETFs and neutral funds and strategies across those allocation portfolios across my career.

Back when I was building these products, I had essentially the choices that you outlined. I could invest in a multitude of pure value products that contained many of the exact types of stocks that you mentioned. Names that have attractive valuation, their PE is always low, their price to book is always low, but it's a business that frankly is just not going anywhere. You get caught in what we all call these value traps. Although conversely, I could buy a momentum product, which many times is full of stocks that are incredibly expensive. They might not even be profitable. They might just be caught up in current hype in the market.

So if I were to be able to put two products like that together, so a value product and a momentum product, I'm oftentimes missing the exact stocks that we think that you want, which are stocks that have an attractive valuation, but have some sort of catalyst to perhaps break free from that valuation, in this case, it's momentum where we're looking for stocks that have an attractive valuation, but also some signs of price improvement. Conversely, and this was kind of your question, it could be the other way as well. It could be a stock with good momentum that is reasonably priced. But the idea, putting them together simultaneously, is to maybe help smooth out some of those rough edges that you mentioned that happen in both value and momentum investing.