Markets Provide Alpha-Driven Relief for Fundamental Investors

Market Summary

US Market: 3/24/2023 - 3/30/2023

• All three major US headline indices had positive returns last week. The S&P 500 posted the highest return at 2.59%, closely followed by the Dow at 2.35%. The Nasdaq finished lower but still in the green at 1.92%.
• Confidence in the Financials sector increased this week following reports of possible bank regulation tightening in the future. The S&P 500 Financials was up 2.5% over the trailing five trading days ending Thursday.
• The market is currently pricing in a halt in rate hikes and then a cut as soon as July. Many analysts point out this can only occur if the economic landscape deteriorates materially over the upcoming months.

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 returned only 10.4%, which places this week’s volatility in the 27th percentile of all weeks since the beginning of 2007.
• Systematic factors accounted for only 13.3% of the portfolio’s return, landing in the 14th percentile and giving this week a “Very Alpha-Driven” classification.
• The alpha-driven market dynamics of the preceding week have benefited fundamental investors who focus on identifying idiosyncratic alpha in their stock-picking.

International Extreme Movers Volatility and Factor-Driven Speedometers

• International markets saw greater returns and were more influenced by factors than their US counterpart, though still less than the mean, classifying this week as an “Alpha-Driven” week.
• Volatility ranked in the 43rd percentile, while systematic factor influence ranked in the 22nd percentile on an inception-to-date basis. Alpha-Driven behavior was the most evident in the Financials and Industrials sectors.

US Extreme Movers Portfolio Exposures

• For the first time in the past month, this week's story does not center on a highly negative allocation to any sector. The Consumer Discretionary and Health Care sectors are the most underweighted, falling at the 24th and 12th percentile on a trailing-twelve-month basis, respectively.
• Software drove the long allocation in Information Technology, while Energy's only contributor was Oil, Gas & Consumable Fuels. Real Estate, a significant short allocation in last week's portfolio, has bounced back to long territory due to a strong allocation to a rebounding Office REITs industry.
• Broadline Retail, Specialty Retail, Hotels, Restaurants & Leisure drove Consumer Discretionary's short allocation. In contrast, Textiles, Apparel, & Luxury Goods saw a contrasting long allocation at a smaller magnitude. Health Care saw negative allocations across all industries, with Health Care Providers & Services having the most negative allocation.

• This week, all factor exposures landed in the two middle quartiles ITD, highlighting the "Very Alpha-Driven" nature of the markets. Exposures to Volatility and Beta were near their trailing twelve-month means.
• Value was favored over Growth, albeit slightly, thanks to the Dividend Yield exposure from both sides of the book. This suggests that investors were long high dividend-paying stocks and short non-dividend-paying ones.
• The negative allocation to HF Crowding came exclusively from the short book (i.e., short popular longs), and the same happened for Short Interest (short popular shorts).
• The positive exposure to Interest Rate Beta came exclusively from the short book, indicating that investors were fleeing from stocks with an inverse relationship with rising interest rates.

International Extreme Movers Portfolio Exposures

• The International Extreme Movers portfolio had very contrasting allocations to its US counterpart. Consumer Staples led the long side of the book, while Financials, Real Estate, and Industrials dictated the shorts.
• Brazil saw the largest long allocation in the portfolio, followed by Mexico, Canada, and Indonesia. India, Hong Kong, China, and Taiwan were the book's most significant short allocations.
• Brazil and Canada primarily drove the portfolio's long allocation to the Consumer Staples sector, with notable contributions from Indonesia and South Africa. Meanwhile, Hong Kong, China, and India influenced the short allocations to the Industrials and Real Estate sectors.

• The International Extreme Movers portfolio differed significantly from its US counterpart regarding style exposures. Notably, international markets indicate a preference for Growth over Value on both sides of the book and all underlying descriptors.
• The portfolio's Volatility and Beta factors fall within the middle quintile on a trailing-twelve-month basis, bordering the mean. Their neutral standings are due to the portfolio's long and short positions in low-beta and high-volatility names, respectively.

Regards,
David