Episode Summary
Executive Summary: The episode explains how Victory Capital builds factor-based portfolios that combine momentum and value, arguing that momentum is real, systematic, and often misunderstood as mere performance chasing. Lance Humphrey details a rules-based process using value and momentum scores, sector-neutral ranking, volatility adjustments, and equal-risk weighting to capture both factors while reducing concentration and turnover.
Main Topics: Momentum as a real, systematic factor (Priority: 5/5): The conversation distinguishes quantitative momentum from simple recency chasing, emphasizing research support and why it persists despite seeming intuitive resistance. Combining value and momentum (Priority: 5/5): Victory Capital’s strategy blends valuation and trend signals to avoid owning only expensive winners or cheap laggards, aiming for more balanced factor exposure. How the portfolio is built (Priority: 5/5): Humphrey explains the index methodology: value metrics, 6- and 12-month momentum, sector-neutral scoring, top-quartile selection, and equal-risk weighting. Why value is more accepted than momentum (Priority: 4/5): The speakers discuss investor psychology and why value feels natural to most people, while momentum can be hard to sell or emotionally accept. Regional differences in factor performance (Priority: 4/5): The discussion contrasts U.S. large caps with international markets, noting that value and momentum can work differently by geography and that international markets currently show stronger breadth. Turnover, rebalancing, and portfolio controls (Priority: 4/5): Humphrey outlines quarterly rebalancing, buffers to reduce churn, and rules that allow holdings to remain until signals deteriorate meaningfully.
Key Arguments: Momentum works because trends can persist, but standalone momentum can be vulnerable to crashes when it chases very expensive names. Pairing value with momentum can improve robustness by filtering for stocks that are both attractively valued and exhibiting positive trend. Value is easier to understand and market than momentum because investors naturally think in terms of bargains rather than buying what has already risen. The strategy is not style-agnostic; it intentionally seeks stocks with decent characteristics on both value and momentum, regardless of whether value or momentum comes first. Value and momentum are often negatively correlated, making them complementary factors in a portfolio. Sector-neutral ranking prevents the portfolio from becoming a disguised bet on a single hot area such as AI, staples, or financials. The methodology uses multiple valuation inputs from different financial statements to avoid overreliance on one metric. Momentum is measured over intermediate horizons because very short-term trends can mean-revert and very long horizons dilute the signal. Equal-risk weighting is preferred over equal-weighting because volatile stocks should not dominate portfolio risk. The approach is systematic and index-based, limiting discretionary tinkering while still allowing methodology updates in advance.
Data Points: MTUM assets: $19 billion - Estimated size of the largest momentum ETF discussed in the opening commentary. VTV assets: $150 billion - Used as a comparison to show how much larger value-oriented assets are than momentum assets. Momentum/value portfolio universe selection: Top 25% - Victory Capital’s strategy selects the top quartile of stocks after scoring for both value and momentum. Rebalancing frequency: Quarterly - The portfolio is re-evaluated and rebalanced every quarter. Momentum lookback windows: 6 and 12 months - The strategy averages six- and 12-month momentum to capture intermediate-term trend strength. Holding buffer: Down to the 50th percentile - Existing holdings can remain in the portfolio until they fall substantially below the cutoff, reducing turnover. US large-cap market concentration: Over 30% - The MAG7’s weight in the market was cited as distorting U.S. large-cap factor comparisons. Value underperformance: 15 years - Humphrey referenced value’s long stretch of disappointing performance. AI stock valuations: Two, 300 times PEs - Illustrative example of how momentum can attach to extremely expensive stocks.
Pivotal Quotes: "It's value and momentum, which is interesting. It looks at both of these. So it's kind of a composite thing." — Michael Batnick: Introductory framing of Victory Capital’s approach before the interview with Lance Humphrey. "We want to find stocks that share characteristics of both." — Lance Humphrey: Explaining the core philosophy of combining value and momentum rather than treating them separately. "Momentum is not necessarily growth." — Lance Humphrey: Clarifying that momentum can rotate into different sectors and styles depending on what is working.
Implications: Listeners should view momentum as a disciplined factor, not just performance chasing. For allocators, combining momentum with value may offer more durable exposure, lower crash risk, and better diversification across market regimes and regions.
About Animal Spirits Podcast
Animal Spirits is a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, listening to and watching. Look for new episodes every Wednesday morning. See our disclosures here - https://ritholtzwealth.com/podcast-youtube-disclosures/