“Without an understanding of portfolio factor exposures, how else would investors be able to tell if their value manager, for example, is actually providing value exposure.” -Ronan Israel
In the fundraising world, potential LP investors and allocators have become much more quantitatively adept at dissecting the return streams of potential managers, for better or worse:
“Your returns against your ‘value’ benchmark look impressive but the explanatory power of your small cap tilt is much stronger in our multi-variate regression model. We believe your inadvertent capturing of the long-term small company premium has been a bigger contributor to your portfolio returns than your ‘value’ alpha capture.”
I’m sure that’s not how most conversations go…
The new-age danger with style factor attribution is that portfolios that fall under the same style umbrella can be vastly different. We’ve provided some explicit examples in previous Early Looks (Here’s one example: “Everybody Loves a Good Buzzword”).
The statement that “growth” is crushing “value” is elusive and worth a discussion given the skyrocketing number of pundits commenting on “factors” and “smart-beta” over the last few years. Be wary of creating a style-box, “smart-beta” salad with your 401K.
Back to the Global Macro Grind….
Our perception is that most of the style-factor commentary from tourists references the most popular style indices to which the most money is benchmarked (i.e. Russell 1000 “Value” would be one). We find the mounting evidence about the structural irrelevance of the longstanding methodologies for identifying “value” to be fascinating considering it gets literally zero press - it’s hard for any of us to sift through our 401K fund options without coming across Russell Style benchmarks in the docs. So, to reiterate what we already know, not all factor construction is created equally.
This morning, we’ll make just a few points on relative factor performance trends right now that we find interesting as cyclically minded analysts. Take it or leave it…
Pretty much any way you construct each factor exposure, “growth” has had a good-run against “value” to say the least. As an example, see our Chart of the Day below which is actually three separate images where we look at L-T Total Return factor indices:
- Top Performance Table: R1K and R2K “Growth” Total Return Indices (GRTR) have crushed Russell “Value” Indices (VATR) over the last 5 years. Also included is The RAFI U.S. Value Index (RADMFUVT).
- Lower Left: Rolling 3Yr Cumulative Total Returns (R3K “Growth” over “Value”). Throughout this cycle we haven’t seen any extended period of time where growth wasn’t outperforming value on a trailing basis. This chart looks the same for various constructions of these style factors.
- Lower Right: Rolling 3Yr Cumulative Total Returns (R3K “Growth” over “RAFI U.S. Value”)
Here are a few notable comments on those Chart of the Day images:
- On broad “Growth” outperformance, remember that it is pretty much a non-discussion at this point that “Growth” as a factor exposure underperforms other factor constructions of the “Value” or “Momentum” nature over the long-term.
- The RAFI US Value Index is an active value, or “smart beta” strategy from Research Affiliates. It’s methodology for value 1) Crushes the broader market long-term purely based on returns; 2) Crushes the Popular value style indices. The fact that the RAFI Value Index has underperformed growth for an extended period of time is of interest to us.
- From what we gather, the quant community steers clear of cyclical explanations in explaining fundamental factors, but through our lens, these long-term relative performance charts look cyclical.
Here are some additional thoughts to consider, which may or may not be cyclical in nature:
- Index: The Info Tech sector of the S&P 500 has grown from 15% to 26% of the index in 10 years (19% to 26% in the last 5 years). In the Russell 3000 the sector index weighting has grown from 14% to 21% over that same 10Yr period.
- Momentum: MTUM is the ticker for a broad-based Momentum strategy that, among a few other nuances, is constructed to own a basket of stocks with the highest 6 & 12-Mth price momentum in the mid and large-cap space. In just 5 years, the Info Tech weighting has gone from 5% to 41% of the portfolio currently.
- Growth: The Info Tech Weighting in the Russell 3000 Growth Index is 34% compared to 22% just 5 years ago.
- Value: The Info Tech Weighting in the Russell 3000 Value Index is 9% compared to 8% five years ago.
Like we said, take the data as you wish, and if anything, know what you’re buying! No style box salad for you.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.84-2.99% (bearish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Utilities (XLU) 52.55—53.70 (bullish)
REITS (VNQ) 81.34-83.44 (bullish)
Industrials (XLI) 74.37-76.83 (bearish)
Nikkei 210 (bearish)
DAX 127 (bearish)
VIX 10.16-14.77 (neutral)
USD 94.55-96.96 (bullish)
Oil (WTI) 65.76-68.57 (bearish)
Nat Gas 2.75-3.02 (bullish)
Gold 1178-1216 (bearish)
Copper 2.58-2.78 (bearish)
Good luck out there today,
Ben Ryan
