BAML: Quant Mutual Funds Underperforming Stocks in 2019

December 10, 2019 | Liquid Alternatives, News
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New BAML report shows a shift in performance for the quant funds space

Quantitative funds are lagging behind the major stock market indexes in 2019.

The market is heading towards its best year since 2013. However, those funds managed based on investment factors have not kept up with the indexes.

According to a recent report from Bank of America research analysts, large-cap funds managed using quantitative analysis are lagging the indexes by an average of 3.2% for the year. Only 11% of these funds have managed to outperform.

The report noted that in November, the leading factor was value, which suggests that we may be seeing a switch in investors’ focus from growth stocks back to a value approach after a decade long period of growth outperformance. Some analysts have suggested that the valuation gap between value stocks and growth stocks is at historical extremes and should revert back in favor of value sometime soon.

Quantitative Funds and Value

Many quantitative funds have a large value component, and that has been a considerable factor in their underperformance this year. A shift to value factors such as enterprise multiples and book value could give quantitative funds a boost in 2020.

Cliff Asness of AQR Asset Management, one of the best know quantitative investors, recently suggested that it was time to consider upping the allocation to value factors.

A long-time critic of trying to time factors he wrote in a research paper this month that “Value does not look like a factor with too many people chasing it today (as we are often asked), rather it looks like a shunned out-of-favor factor. At best, that creates opportunity, at worst, it means the last almost two, or even the last 10, years don’t show a permanently broken value factor. Instead, they show one that hasn’t worked for the same reason it has had tough times in the past: it’s on the outs with investors.7 We end up with a view that, unlike a few years ago, it is indeed time to “sin a little” (up the value weight somewhat). Factor timing is an ugly thing. But I think it is about time we did some!”

Related: BofAML: Assets at European ESG Equity Funds Could Rise by €1 Trillion

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