Factor Lull Makes Way for Alpha Opportunities

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: 08/05/22 - 08/11/22

• All three headline US indices were positive this week. The Nasdaq led the group at 2.6%, while the Dow and the S&P followed at 1.9% and 1.3%, respectively.
• The latest Consumer Price Index report, released this Wednesday, reflected a slowing inflation rate of 8.5%. The market welcomed the news as the S&P 500 climbed 3.8% over the second half of the week.
• As crude oil prices bounced back this week, energy stocks saw a recovery spark.

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 US Extreme Movers portfolio saw a slight slow-down in performance this week but still landed above its year-to-date median at 21.6%.
• The real story is that this was the second most alpha-driven week of 2022 and the most alpha-driven since the week ending March 2nd.

• The International Extreme Movers Portfolio also showed a reduced return this week, though to a more significant degree, landing below its year-to-date median at 16.1%.
• Alpha contribution landed just above its year-to-date median, while country and currency factors accounted for most of the portfolio's systematic tailwinds.
• Brazil was the most significant country overweight in the portfolio, which drove much of the systematic performance, given a sharp rally in both the broad market and the Brazilian Real.

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.

• This week was the most diversified in terms of sector allocation in 2022. The largest absolute allocation came from Consumer Staples at just -9%, well below the year-to-date maximum sector allocation of 26%.
• Materials were the most prominent long allocation at 7% this week, driven mainly by Metals & Mining. At the same time, Food Products and Food & Staples Retailing stocks made up the short position in Consumer Staples.

• Style exposures also showed a similar trend this week. Although most key factors maintained directionality from the prior week, they were significantly closer to neutral.
• The US Extreme Movers portfolio held a high beta/volatility and anti-value/quality posture. Still, most volatility and value-oriented factor exposures were down by > 50% of their prior levels.
• The US portfolio remained long popular hedge fund short stocks as those stocks continued to rally, likely creating challenges for short sellers across the market.

• This week showed many similarities between the US and International Extreme Movers portfolios. Materials and Consumers were the most significant long and short allocations, respectively.
• The international portfolio also took less dramatic sector positions this week, though the Metals & Mining tilt was much stronger internationally, which drove the long allocation in Materials.

• The International Extreme Movers portfolio also aligned with the US version from a style exposure perspective as it mostly moved closer to neutral across the board.
• The portfolio leaned further away from profitability and quality factors but gravitated back into stocks with a positive relationship to interest rates for the first time in three weeks.

Regards,
Kevin