Value Geographically Split Ahead of Pivotal CPI Print

Market Summary

US Market: 7/5/2024 - 7/11/2024

• US headline indices were in the green this week. The Dow led with a 1.13% return over the five trading days ending Thursday. The S&P and the Nasdaq followed at 0.86% and 0.52%, respectively.
• The CPI fell 0.1% in June which represented a 3% rise over last June. That 3% increase was lower than the 3.3% reading from May which sparked optimism from economists and investors. Core CPI, which excludes energy and food prices, rose 0.1% in June which was lower than the 0.2% consensus.
• US small cap stocks saw a sharp rally in Thursday’s trading session. The IWM (iShares Russell 2000 ETF) outperformed the SPY (iShares S&P 500 ETF) by nearly 4.5%. Size factors in some US risk models showed moves of greater than five standard deviations on the down side.

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

• US market volatility landed in “Neutral” territory this week as the US Extreme Movers portfolio returned 11.7%. That return marks the 41st percentile since inception.
• Factor influence was also categorized as “Neutral” as 23.4% of the portfolio’s return was attributable to factors. That contribution fell in the 49th percentile since inception.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers portfolio pointed to “Neutral” levels of volatility as well. The 14.5% return this week represents the 44th percentile since inception.
• Factors accounted for 27.4% of the portfolio’s return which is the 52nd percentile since inception and is therefore also categorized as “Neutral”.

US Extreme Movers Portfolio Exposures

• This week, healthcare services dominated the US extreme movers portfolio, constituting 14% of its allocation. This marks a significant change from last week, where it shifted from being the largest short allocation to the largest long allocation. This positioning places the sector in the 91st percentile based on a trailing twelve-month basis and the 84th percentile since inception.
• Financials remained the second most represented sector this week at 10%, landing in the 73rd percentile on a trailing twelve-month basis. The main driver of this allocation was banks, which contributed 8% alone.
• On the flip side, Industrials fell short this week with an allocation of -11%, placing in the 13th on a trailing twelve-month basis and 10th percentile since inception. Grounds Transportation and Professional Services were the main contributors to this short allocation.
• Consumer Staples continued to fall short this week with an allocation of -9%, reaching the 9th percentile since inception. All industries within the sector contributed to this negative exposure, with Personal Care Products being the primary driver.

• This week, growth factors were notably weak in both Axioma and Barra models, placing them in the bottom decile on a trailing twelve-month basis. Both the long and short sides of the portfolio reflected this trend, suggesting that investors chose to sell high-growth stocks and invest in stocks with lower exposure to growth.
• Beta and volatility factors showed neutrality this week, with all factors landing near the 50th percentile for both TTM and ITD. In this category, the long side of the portfolio generally added positive exposure, while the short side contributed negatively. This indicates that investors gravitated towards high volatility names for buying and selling activities.
• Value factors were mixed this week. Dividend Yield saw positive exposures across the three models, with factors landing between the 70th and 80th percentile in an ITD basis. This was primarily driven by the short book which shows that investors decided to bet against names with low dividend yield. In contrast, Earnings Yield saw low exposures this week, this came primarily from the long book.
• Quality factors were also mixed this week. Axioma’s Profitability factor was notably low at -0.21, placing it in the 9th percentile on a trailing twelve-month basis. This suggests investor interest in purchasing stocks with negative exposure to profitability metrics. Meanwhile, Barra’s Management Quality factor was positive, landing near the 70th percentile since inception. This positive performance was driven primarily by the short allocation to the software sector.

International Extreme Movers Portfolio Exposures

• This week, Communication Services took the lead in sector exposures for the International Portfolio, commanding a 6% allocation that places it in the 96th percentile for trailing twelve months (TTM). This allocation was primarily driven by stocks from South Korea, Brazil, and Thailand.
• Information Technology emerged as the second most represented sector this week, comprising 6% of the portfolio. Electronic Equipment, Instruments & Components stood out as the primary driver, contributing 4.5% alone to this sector's allocation. Software was the only industry within the sector that showed negative representation, at -1.12%.
• Industrials experienced a significant shift this week, moving from a 9% long allocation last week to a -7% short allocation. This places the sector in the bottom quintile for both TTM and ITD. Marine transportation had the most significant impact on this allocation, contributing -6.74% alone, while electrical equipment showed a positive representation of 2.81%.
• The Energy sector also showed a negative exposure this week, with a -6% representation. This places the sector in the 10th percentile for trailing twelve months and the 13th percentile since inception.

• Value Factors were significantly low this week, particularly for Dividend Yield and Earnings Yield factors which landed around the 2nd percentile for both TTM and ITD. Both the long and short books of the portfolio contributed to this negative exposure, showing that investors favored low value names while betting against high value names.
• Crowding factors were notably low this week. Short Interest landed in the 4th percentile on a trailing twelve-month basis, primarily influenced by the short allocation to the Industrials sector, contributing -0.20 alone. HF Crowding was notably low as well at -0.14, with contributions from both the long and short sides of the portfolio. This suggests that investors chose to bet against stocks present in hedge fund portfolios while favoring those less popular among hedge funds.
• Beta and Volatility factors were mixed this week. Axioma’s Volatility factor exposure was low at -0.21 landing in the 22nd percentile since inception. The short and long books acted in opposite directions as investors decided to bet against names with high volatility while also buying high vol names to a lesser extent. On the other hand, market sensitivity saw a high exposure as it landed in the 72nd percentile TTM.

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 dominated the International Portfolio with a 3% long allocation. placing in the 57th percentile for TTM and 51st percentile for ITD.
• Within Emerging Markets, the Americas was the most represented region, comprising 20% of the allocation, marking the highest for this region on a trailing twelve-month (TTM) basis. Brazil was the primary driver, accounting for 13%, followed by Mexico at 6%. In contrast, Asia had a short allocation of -18%, primarily driven by China at -39% alone.
• In the Developed Markets, most regions showed muted activity. The Pacific region contributed -2% to the total allocation, with Hong Kong being the main driver at -3%. Europe and the Middle East experienced a significant shift, decreasing from a 10% allocation last week to -2% this week. Sweden and Norway were the primary contributors to this decline, representing -3% and -2% allocations, respectively.

Regards,
Jose