AGF Logo
  • Home
  • Industry and Expert Views
  • Investing and Market Views
  • Capitol Insights
  • Français
  • AGF.com
Skip to content
AGF logo
Insights and Market Perspectives
  • Industry and Expert Views
  • Investing and Market Views
  • Capitol Insights
  • Contributors
  • Français
  • Search
Search
Close
Factors to watch in a rising rate environment

  • Investing and Market Views

For Print Only Logo
Insights and Market Perspectives

Factors to watch in a rising rate environment

Author: Mark Stacey

May 18, 2018

Momentum stocks have benefited from the past few years of unprecedented low volatility and have been a leading contributor of returns in many factor-driven investment strategies over that time. But now that interest rates are on the rise and volatility is back, other style factors such as value, quality and size look poised to provide a greater share of gains going forward.

This isn’t to say these three factors have performed badly of late. In 2017, they each returned greater than 20%, according to MSCI data. Instead, it’s more about the potential of some factors to outperform others in different periods of a market cycle.

A decade of factor returns

MSCI as of December 31st, 2017. MSCI index methodology resources available at www.msci.com. MSCI World Momentum Index denoted as Momentum; MSCI World Equal Weighted denoted as Size; MSCI World Enhanced Value Index denoted as Value; MSCI World Sector Neutral Quality Index denoted as Quality; MSCI World Minimum Volatility Index denoted as Volatility. One cannot invest directly in an index. Index returns are for illustrative purposes and do not represent the performance of actual accounts or reflect management fees, transaction costs or expenses. Source: Morningstar Direct as of December 31, 2017.

Value, for instance, has been somewhat neglected by investors who have been more willing to pay a premium for growth stocks in the low interest rate environment of the past decade. As rates rise, however, and the discount rate on earnings moves higher, these same investors are likely to forego premium valuations in favour of stocks that are less expensive.

High quality companies that have strong balance sheets with stable earnings and low debt levels should benefit from rising rates as well. A more normalized credit cycle will be less forgiving, however, to highly levered companies who can no longer depend on near zero interest rates to bolster profitability.

There’s also a growing expectation that the size factor will do relatively well in this changing rate environment as small capitalization stocks reassert their historical outperformance over larger cap names. This relationship has been flipped on its head at times during the long-running bull market because investors have been more inclined to buy up the market’s biggest companies and keep a low risk profile.

All things considered, investors can expect some changes in terms of those factors that will help drive performance over the next few years. This should prompt periodic portfolio adjustments, but doesn’t mean loading up wholesale on one factor over others. A disciplined multi-factor approach that continually assesses the interplay between factors remains the best option to pursue.

Mark Stacey* is a senior vice president, head of portfolio management & co-chief investment officer at AGFIQ.

*A registered advising representative in Canada with Highstreet Asset Management Inc., a subsidiary of AGF Investments Inc.
Commentaries contained herein are provided as a general source of information based on information available as of May 15, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
AGFiQ Asset Management (AGFiQ) is a collaboration of investment professionals from Highstreet Asset Management Inc. (HSAM), a Canadian registered portfolio manager, and of FFCM, LLC (FFCM), a U.S. registered adviser. This collaboration makes up the quantitative investment team.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

© 2022 AGF Management Limited. All rights reserved.

Written by

Mark Stacey

Mark Stacey, MBA, CFA®

Senior Vice-President, Co-CIO AGFiQ Quantitative Investing, Head of Portfolio Management

AGF Investments Inc.

More from Mark Stacey

  • Investing and Market Views

Manufacturing the Case for Infrastructure Stocks

June 25, 2021

  • Investing and Market Views

Under Construction: Why the Case for Listed Infrastructure Continues to Build

July 2, 2020

  • Investing and Market Views

When Opportunity Starts to Knock Again

April 8, 2020

  • Investing and Market Views

Managing for a Speedier Recovery

March 30, 2020

Get perspectives straight to your inbox.

Subscribe now

More articles like this.

Will the Fed and Other Central Banks Get It Right?

  • Investing and Market Views

Will the Fed and Other Central Banks Get It Right?

Kevin McCreadie | May 20, 2022

Investors should expect market volatility to continue until it is better understood what impact tighter monetary policy will have on inflation and economic growth, says AGF’s CEO and Chief Investment Officer.

Read More
What Happens to Industrial Stocks When Supply Chain Issues Ease?

  • Investing and Market Views

What Happens to Industrial Stocks When Supply Chain Issues Ease?

Wai Tong | May 19, 2022

Transport stocks may be in for one of the bigger shake ups

Read More
Why Food Inflation Has an Outsized Impact on Emerging Market Bond Investors

  • Investing and Market Views

Why Food Inflation Has an Outsized Impact on Emerging Market Bond Investors

Tristan Sones | May 12, 2022

Some EM countries will benefit while others will be adversely affected, write AGF’s Co-Heads of Fixed Income.

Read More
AGF Logo
  • Industry and Expert Views
  • Investing and Market Views
  • Capitol Insights
Follow AGF

AGF Web Site Pages © 2022 AGF Management Limited. All rights reserved.

Links
  • Terms & Conditions
  • Privacy
  • AGF.com