The above relationship is intuitive. During periods of market dislocation, investors tend to gravitate to stocks that are perceived to be safer. What’s less intuitive is isolating which stocks fit into which categories.
For example, investors typically equate higher beta or riskier “glamor stocks” with momentum. However, momentum is often found in unexpected places, such as in healthcare stocks. While the healthcare sector is generally considered “defensive”, with an empirical beta of roughly 0.80 to the market, today healthcare comprises more than 25 percent of the MSCI Momentum Index, versus 15 percent of the S&P 500, based on data from the index providers.
As for what this means for portfolios, investors should recognize that they may have momentum lurking in their portfolios in unexpected places, including in many actively managed funds. This isn’t necessarily a bad thing, because as I pointed out above, momentum exposure can add to a fund’s return over the long term.
That said, in the short term, an environment of rising volatility is unlikely to be as favorable for momentum as the regime of low and stable volatility we’ve enjoyed over the last few years. As such, investors may want to look for ways to add exposure to complimentary factor exposures, notably quality, which may potentially perform better than momentum in an environment of rising volatility.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.