Value & Momentum Factor Portfolios

How to Combine Cheap and Winning Stocks.

January 2018. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Value and Momentum complement each other given a low or negative correlation
  • Investors have different options for combining these two factors
  • The multi-factor model selection will be determined by investor preferences


Being a Value investor is difficult in general given that the stocks of a Value portfolios tend to have inherent issues as otherwise they would not be cheap. Having been a Value investor over the past decade has been especially hard as the factor returns were effectively zero – plenty of pain, but no gain. Experiencing this factor cyclicality often leads investors to contemplate adding other factors in the hope of improving performance. An obvious candidate would be Momentum as cheap and rising stocks are more appealing than cheap stocks. However, it is not quite straight forward for investors to add Momentum to a Value portfolio as there are several options available. In this short research note we will analyse Value & Momentum portfolios created by three common multi-factor model approaches – the combination, the intersectional and the sequential models (read Intersectional Model: Sorting 7 Factors).


We focus on the Value and Momentum factors in the US stock market. The factors are created by constructing long-short beta-neutral portfolios of the top and bottom stocks ranked by the factors. Portfolios rebalance monthly and include 10bps of transaction costs. Only companies with a market capitalisation of larger than $1 billion are included. The following three multi-factor models are utilised:

  • Combination model: Single factor portfolios are created and combined into one portfolio
  • Intersectional model: Stocks are ranked by several factors simultaneously
  • Sequential model: Stocks are sorted by factors sequentially

The portfolios are created so that they approximately contain the same number of stocks, which equates to the top and bottom 10% of the universe of 1,800 stocks. For a detailed report on these three models please see our white paper Multi-factor Models 101.