Alpha Opportunity Available Despite Falling Oil Prices Driving Macro Moves

We hope you all had an enjoyable and relaxing Labor Day Weekend with your families and loved ones. With the markets back in full swing amid significant economic uncertainty, we hope Factor Spotlight's weekly insights continue to be a vital part of many of your arsenals to help successfully navigate the uncharted waters ahead.

Over the past several months, we've introduced Extreme Movers, the latest tool in our arsenal to understand what is driving markets from week to week. We also debuted an international version of the Extreme Movers portfolio to help investors compare fluctuating alpha opportunities and factor-driven dynamics between the US and the world. The Extreme Movers portfolios allow us to apply hindsight to the prior week's momentum to understand the following key questions better:

1. Was the preceding week an alpha-driven or factor-driven week?
2. What are the factor characteristics of the stocks that drove the market?

The Extreme Movers portfolios are weekly-rebalanced, market-neutral portfolios that consist of the top decile of stocks from the Russell 1000 and the MSCI ACWI ex-US, respectively, based on performance on the long side and the bottom decile on the short side. You can find additional information on the construction of the Extreme Movers portfolio in the May 22 edition of Factor Spotlight.

US Market Summary and Extreme Movers Metrics

US Market: 09/02/22 - 09/08/22

• The market snapped a two-week losing streak, showing its most vigorous recovery in the latter half of this week. The S&P 500 led the way with a 1.0% return through Thursday, while the Nasdaq and Dow followed at 0.7% and 0.4%, respectively.
• Oil prices continue to fall as US Crude Oil hit its lowest levels since January this Wednesday, forcing Energy stocks lower.
• Labor negotiations for freight railroad union workers are near a vital deadline next week. Should a strike ensue, experts warn that the supply chain implications could cost the US economy $2 billion per day.

Extreme Movers Portfolio Performance

Please note that the portfolio's return will always be positive by constructing a portfolio that is long the top movers and short the bottom movers in an index. That said, there are several areas we want to observe around weekly performance:

1. Is the weekly performance below or above the recent median weekly performance? Above the recent median means that the Extreme Movers portfolios had much higher dispersion than a typical week, most likely driven by higher factor volatility.
2. Is the weekly alpha contribution below or above the recent median alpha contribution? Above the recent median demonstrates that the significant market moves were more alpha-driven than in a typical week. Below the median, the market moves were more factor-driven than in a typical week.

• The past two weeks have shown some of the lowest week-over-week returns in the US Extreme Movers portfolio, indicating significantly less return dispersion in the market.
• Despite less dispersion, alpha notched its most significant percent contribution to return the week of August 31 and remained above its year-to-date median this week.
• This past week saw an increase in Industry factor contribution, concentrated in Oil & Gas E&P and retail industries.

• The international portfolio has remained remarkably consistent in total week-over-week returns and continues to sit below its year-to-date median.
• The one significant difference stemmed from contributions in Country and Currency factors. This past week, the portfolio was heavily underweight Japan, driving 218 bps of performance.

Extreme Movers Portfolio Exposure

Looking at the Extreme Movers from an exposure lens helps us decompose the individual styles and sectors associated with the portfolio's factor-driven performance and better understand broader patterns such as risk-on / risk-off or sector rotation.

• The US portfolio returned to its all-too-familiar short allocation in Information Technology this week, though a late rally added some relief for tech.
• The second largest short allocation was Energy, as the portfolio positioned itself favorably to plummeting oil prices.
• Industrials and Consumer Discretionary were the largest overweights this week, led by Building Products and Multi-Line Retail, respectively.

• From a style point of view, the US portfolio drifted back to a familiar posture of being heavily anti-beta and anti-growth. What was interesting this week, however, is that the portfolio also moved away from value factors.
• The real catalyst this week was macro, as the portfolio’s most significant underexposure was to Oil Beta this week, marking a strong reversal from the week prior.
• The portfolio was underexposed to crowding factors to a high degree. The short side of the portfolio consisted of high HF Crowding names which tend to signify harsh headwinds for hedge fund managers.

• The international portfolio mimicked the US version with a large short allocation to Information Technology this week, which resided primarily in Semiconductors.
• Insurance and Banks drove the long allocation in Financials while Construction Materials and Metals & Mining contributed to the 9% net position in the Materials sector.
• Industrials marked the most considerable disparity between the US and international portfolios due to a 7% short allocation to the Marine industry.

• The international portfolio shared fundamental characteristics as it leaned away from high beta, volatility, and growth, though it remained positive on value factors.
• Quality was another area of consistency as the international portfolio moved from speculative, volatile stocks into more profitable, higher-quality names.
• As expected, the most significant exposure was Oil Beta, as the portfolio's underexposure took advantage of the commodity's price decline.

Regards,
Kevin