Over the past couple weeks, we’ve spent time analyzing what pockets of the market offer the most alpha opportunity for active managers. We found that the alpha opportunity ratio can be a useful metric to understand when and where managers have higher opportunity to align portfolio risk with their alpha ideas. This week, we’ll wrap up this analysis by using the alpha opportunity ratio in a slightly different way to answer the following question - can we put enough capital behind alpha opportunities?

In last week’s Factor Spotlight, we introduced the notion of the diversification ratio as a way to quantify the degree of diversification opportunity across a universe of securities. Using this metric, we analyzed the level of diversification available across various segments of the US market.

This week, we continue our analysis by highlighting the application of this ratio and offering a heuristic guide for understanding the attractiveness of stock picking within an analyst coverage universe.

Alpha and diversification have been especially elusive since the start of the pandemic in early 2020. As we’ve discussed previously, common systematic factors grab a tighter hold of stocks during periods of market stress, and assets begin to get pushed in a much more correlated fashion. So, to supplement our research on the return of alpha opportunity in the market, we will explore diversification this week.

The buzz continued around the $1 trillion US infrastructure bill this week, as the bill faced unexpected rocky roads in the House. However, the House was able to clear a path for the bill and now targets a vote on Sept 27. Though there is still uncertainty around the bill’s final details, it feels clear that the focus on infrastructure spending, along with an emphasis on sustainability and clean energy, is here to stay.

Before we jump into this week's topic, I wanted to mention that my colleague and ace Factor Spotlight author, Alyx Flournoy, is featured in a just-released video from Qontigo that highlights its partnership with Omega Point. In addition, Alyx briefly demonstrates how to analyze a portfolio on the Omega Point platform using the new Axioma Global Macroeconomic Projection model, which quite coincidently also makes a key appearance in today's analysis. We encourage you to check out the video here.

Now on to our focus topic of the week. On August 10th, the Senate voted in favor of a $1 Trillion bill that addresses a wide array of infrastructure funding, notably power and transportation. Two key areas of spending are modernizing the power grid and, more broadly, mitigating negative climate impacts through clean energy. While the bill still needs to get through the House this coming week, we decided to look at stocks most likely impacted by these aspects of the proposal to understand the broader characteristics and key common factor influences that have and will continue to drive risk and performance.