Investors Look to Harvest Alpha in a Risk-On Environment

Market Summary

US Market: 5/2/2024 - 5/9/2024

• Major US headline indices have shown strong performance over the last five trading days, ending Thursday. The S&P 500 led the pack with a return of 3.44%, followed by the Nasdaq at 3.19%, and the Dow with 3.04%.
• US futures are pointing to continued gains, positioning the S&P to conclude its third consecutive positive week. This trend persists as data suggests imminent Federal Reserve rate cuts. However, investors remain cautious as they await the crucial US inflation print, which will serve as the true test.
• Commodities are also on the rise as optimism surrounding potential rate cuts grows. Gold reached its highest level in three weeks, oil marked its third consecutive positive day, and copper continued its ascent amid of supply concerns.

Extreme Movers Portfolio Performance

Note: Extreme Movers definitions can be found in Factor University on our website.

US Extreme Movers Volatility and Factor-Driven Speedometers

• The US Extreme Movers Portfolio surged into the "Very Volatile" territory this week, boasting a remarkable 21.8% weekly return. This places its performance in the 94th percentile on a trailing twelve months basis.
• Factors contributed 8.8% to the total portfolio return this week, categorizing it as "Very Alpha-Driven". This places the return in the 4th percentile on a trailing-twelve-month basis.
• Weeks that are both “Very Volatile” and “Very Alpha-Driven” are advantageous for fundamental investors as stock prices are moving strongly due to idiosyncratic reasons rather than common, systematic factors.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers Portfolio recorded a return of 14.6% this week, classifying it as "Neutral". This return places it in the 47th percentile since its inception.
• Factor returns contributed 18.6% to the total, categorizing it as "Very Alpha-Driven" and placing it in the 13th percentile since inception.

US Extreme Movers Portfolio Exposures

• Health Care as a whole witnessed its largest short allocation of the last twelve months and fell to the 3rd percentile since inception. The 23% short allocation was driven by all industries aside from Pharmaceuticals but Life Sciences Tools & Services and Health Care Providers & Services made up the largest contributions.
• Financial Services and Insurance stocks led a strong reversal in the Financials sector this week. The 9% long sector allocation landed in the 77th percentile since inception which followed a week in which the sector saw a 9% short allocation.
• Despite a 5% long allocation, Information Technology was divided. Semiconductors & Semiconductor Equipment accounted for a 6% long while Software and IT Services saw a 6% short.

• The US Extreme Movers portfolio pointed to a further push in risk tolerance among investors this week as beta and volatility factors all moved into their fourth quintiles since inception. The long allocations in Industrials and Consumer Discretionary accounted for most of the risk appetite.
• The short allocation to Health Care and long allocation to Financials brought Earnings Yield factors up to neutral after the factor had been heavily sold off last week.
• Wolfe’s Short Interest factor showed a strong positive allocation this week which means that heavily shorted stocks were outperforming in the market. Hedge Fund managers in crowded shorts likely felt some downward pressure as a result of the rally.

International Extreme Movers Portfolio Exposures

• Unlike in the US, the Industrials sector was the largest short allocation in the International Extreme Movers portfolio this week. The 7% short fell in the 14th percentile since inception and was driven by stocks across most industries in Asia.
• Food Products and Personal Care Products propelled the Consumer Staples sector to its 94th percentile on a trailing-twelve-month basis. Stocks in India and Brazil were the largest contributors to the 9% long allocation.
• Electric Utilities accounted for a 6% long allocation which put the Utilities sector just below Consumer Staples in the long book. Brazil once again was the primary contributing country to that long allocation.

• Beta factors were in favor in the International portfolio as Axioma and Barra factors reached the top quintile on a trailing-twelve-month basis. That risk appetite was driven by the short book, notably in Financials, Industrials, and Materials.
• Slight short allocations in Consumer Discretionary and Materials, particularly in Japan, drove a strong bias against Barra’s Earnings Quality factor. The -0.26 exposure landed in the 5th percentile on a trailing-twelve-month basis.
• The International portfolio had a strong aversion to interest rates as Wolfe’s Interest Rate Beta factor fell to its 18th percentile on a trailing-twelve-month basis. Japanese and Indian stocks in Consumer Discretionary and Industrials accounted for most of that anti-rate bias.

International Extreme Movers Portfolio Country Exposures

The chart presents the portfolio's exposures to various groups in the Developed and Emerging Markets, highlighting the three most notable country contributors for each respective group's allocation.

• Developed Markets returned to the long book after a week which heavily favored Emerging Markets stocks. The 12% long allocation to DM fell in the 63rd percentile since inception.
• EM Asia showed the strongest reversal from last week, going from a 32% long allocation to a 21% short allocation. That short was driven almost entirely by India which experienced one of its most significant short positions since 2007.
• Japanese Industrial and Financials stocks contributed heavily to a 10% short allocation, though all sectors aside from Information Technology were negative. The 10% short reached the 15th percentile of all allocations on a trailing-twelve-month basis.

Regards,
Jose