Energy and Materials Outperform as Equity Markets Slip

Market Summary

US Market: 3/29/2024 - 4/4/2024

• US headline indices struggled this week. The Dow declined by -3.04% over the four trading days ending Thursday, followed by the S&P and the Nasdaq at -2.04% and -2.02%, respectively.
• Friday’s jobs report was surprisingly strong as the US labor market added more than 300,000 jobs in March and unemployment fell to 3.8%. Headline indices saw a sizeable jump in Friday morning’s trading as a result.
• On Wednesday, Fed Chairman Powell said that recent inflation readings have not “materially changed” the Fed’s outlook regarding the timing of potential rate cuts. His comments had a calming effect on equities after prior comments had been met with caution over fear of delayed timelines.

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 13.0% which categorizes this week as “Neutral” . That return falls in the 52nd percentile since inception but just the 22nd percentile on a trailing-twelve-month basis.
• After a stretch of lower factor volatility, factors accounted for 30.5% of the portfolio’s return this week which lands in “Factor-Driven” territory. That 30.5% contribution marks the 70th percentile of all weeks since inception.

International Extreme Movers Volatility and Factor-Driven Speedometers

• International markets saw a bit more volatility as the ex-US Extreme Movers portfolio returned 16.7%. That return places this week in the 70th percentile since inception and is categorized as “Volatile”.
• Like its US counterpart, the International portfolio pointed to a “Factor-Driven” week as 31.1% of the performance was attributable to systematic factors.

US Extreme Movers Portfolio Exposures

• Energy emerged as the top sector for the US Extreme Movers Portfolio this week with an allocation of 26%, its highest over the trailing twelve months. Driving this allocation was the Oil, Gas, and Consumable Fuels industry, contributing by 22% alone.
• Materials secured the second-highest allocation at 12%, positioning itself in the top percentile TTM and in the top decile ITD. The primary contributors to this allocation were Metals & Mining, accounting for 8%, and Chemicals, for 4%.
• Consumer discretionary drove the 22% short allocation this week, landing in the lowest percentile TTM and at the 4th percentile since inception. Specialty retail was the the primary contributor to this significant short position representing -14% of the total.
• Health Care underwent a notable shift this week, transitioning from a 4% to a -14% allocation, positioning it in the 12th percentile since inception. All industries, with the exception of biotechnology, contributed to this short position.

• Beta and Volatility factors exhibited strong negativity this week, with most factors landing in the bottom quartile for the trailing twelve months. This trend was primarily driven by the short book of the portfolio, indicating that investors were betting against riskier names in a potential flight to safety.
• Conversely, Growth and Value factors exhibited substantial positive exposures this week, with the majority of factors ranking in the top quintile for TTM. Across most factors, both the short and long sides of the portfolio contributed to these exposures. Investors favored Growth and Value names while also betting against names with low exposure to these factors.
• Macro factors also experienced positive exposures, particularly the Oil Beta factor, which ranked in the top percentile for the trailing twelve months. This was predominantly influenced by the long book, reflecting investors' confidence in names with positive sensitivity to oil prices.

International Extreme Movers Portfolio Exposures

• Similar to the trends observed in the US portfolio, Materials and Energy emerged as the top two sectors for the International Extreme Movers Portfolio this week. Materials commanded a 25% allocation, positioning it in the top percentile for the trailing twelve months (TTM) and the 98th percentile since inception. Energy experienced a significant increase from a -3% to a 10% allocation this week, placing it in the 97th percentile for the trailing twelve months.
• Industrials underwent a substantial shift this week, dropping from a 10% to a -8% allocation, positioning it in the bottom decile for both TTM and ITD. Electrical equipment played a significant role in this short allocation, contributing two-thirds of the total.
• In line with the US portfolio, Communication Services and Industrials also experienced substantial short allocations this week in the International Extreme Movers Portfolio, landing in the 2nd and 5th percentile ITD respectively. Both of these short allocations were primarily driven by the short book.

• Value factors were in favor this week with most factors landing above the 70th percentile since inception. Axioma’s Dividend Yield factor saw a big shift going from -0.40 to a 0.30 exposure, boosted by both the long and the short side of the portfolio.
• Like in the US portfolio, Macro factors were in favor. Wolfe’s Oil Beta factor ranked in the 98th percentile for the trailing twelve months. This was driven primarily by the long book in the portfolio contributing 0.44 alone. This indicated that investors favored names sensitive to oil price movements.
• Quality factors exhibited mixed performance this week. Profitability for the Barra model was notably low, landing in the 26th percentile for the trailing twelve months (TTM). This trend was primarily driven by the long book, indicating investor preference for names with stable revenue streams less sensitive to changes in profitability. Conversely, Earnings Quality was favored this week, ranking in the top percentile for TTM. This increase was bolstered by contributions from both the long and short book, suggesting investor preference for names with strong operating fundamentals while opting against those with uncertain ones.

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.

• Emerging Markets took the spotlight this week as with a 20% long allocation ranking it in the top quintile on a trailing-twelve-month basis. In contrast, Developed Markets experienced a -20% allocation, landing in the bottom quintile for both TTM and ITD.
• Asia led this swing, transitioning from a -32% to a 20% allocation, with China and India serving as the primary contributors at 24% and 20% respectively. Meanwhile, Europe, Middle East & Africa also experienced significant shifts, with a 9% allocation, led by contributions from Saudi Arabia, Turkey, and South Africa, each contributing 3%.
• For Developed Markets, the Pacific region stood out as the primary contributor to the short allocation at -27%. Japan played a major role in this short allocation, contributing by 27% and landing in the bottom decile since inception. Conversely, the Americas posted a 7% allocation, ranking it in the top percentile for the trailing twelve months.

Regards,
Jose