Wolfe Research’s new QES Risk Model – US Consumers, TMT & FinTech v2.3

Author: Hallie Martin, Head of QES Risk Solutions, Wolfe Research

The Wolfe QES team’s new TMT, Consumers, FinTech risk model was designed to align with secular growth mandates across multiple sectors where style factors tend to be more correlated. The systematic explanatory power of the model within this segment of the US equity market is significantly higher than our broad US risk model or our more focused TMT risk model.  While Healthcare also offers secular growth opportunities for investors, style factor risk is less correlated to TMT, Consumers, FinTech, while idiosyncratic risk is much higher. Thus, a dedicated Healthcare model is more appropriate. Like all Wolfe QES risk models, our new multi-sector model has broad-market, global coverage to facilitate full coverage of your portfolio even if there are positions outside of the target universe.

We examined the +18% post-election return for an ARK Innovation ex-Healthcare portfolio in our new TMT, Consumers, FinTech risk model versus our flagship US All-Cap v2.1 and sector-specific TMT v2.1 risk models. We found that the new risk model clearly captured significantly more contribution to return from style factors: +210bps more than our US All-Cap risk model in the post-election period.

TMT, Consumer, FinTech risk model captured higher return contributions from style factors post-election

Our TMT risk model attributed even less to the TMT-specific style factors, as ~47% of the portfolio was actually outside of the niche estimation universe in segments like Capital Goods (16%), FinTech (15%), and Autos (9%), and Retail (6%). Within the Consumers, TMT, FinTech segment, we see Momentum has been the strongest performing style factor YTD consistent with the broad market.

TMT, Consumer, FinTech saw a strong risk-on rotation post-election despite the expectation of higher rates

The post-election period saw Momentum continue its YTD rally along with significant gains for Volatility despite the move higher in Interest Rates. Earnings Yield, Profitability, and Short Interest reversed course as expensive, less profitable, heavily-shorted stocks outperformed in the risk rally.  While the directional move in the broad market was consistent for many of these factors, the significance of the moves in terms of magnitude was stronger within TMT, Consumers, & FinTech.

Despite our expectations that the macro environment, policy uncertainty, and geopolitical risks will continue to drive systematic risk in 2025, the stock-selection opportunity within TMT, Consumers, & FinTech has recently been more favorable relative to the post-COVID era.  Portfolio managers focused on these segments of the market where secular growth plays are popular can leverage the new QES TMT, Consumers, & FinTech model to better align portfolio construction with their investment thesis and design hedges that more accurately mitigate systematic risks. 

Stock-selection alpha has been more favorable recently despite systematic rotations on Fed policy & US elections

Wolfe QES risk models are designed to be more adaptive than conventional risk models during periods of regime shift, even within medium-horizon models like this one. During the post-COVID period, systematic risks have been elevated relative to the Quantitative Easing period of the prior decade.  The new Consumers, TMT, FinTech risk model has consistently explained more return dispersion across those sectors than a US All-Cap or TMT-specific risk model.

Schedule a call or contact your account manager to see how your portfolio screens using this model. 

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_{Disclaimer: The content and strategies discussed in this presentation are intended solely for institutional investors. They are not suitable for retail investors and should not be considered as individual investment advice. Please consult with your own tax and investment advisor to assess whether the strategies align with your specific financial goals and risk tolerance. Past performance is not indicative of future results. The content of this report is to be used solely for informational purposes and should not be regarded as an offer, or a solicitation of an offer, to buy or sell a security, financial instrument or service discussed herein or to participate in any particular trading strategy in any jurisdiction. None of the material, nor its content, nor any copy of it, may be altered in any way, or transmitted to or distributed to any other party, without the prior express written permission of Wolfe Research, LLC.  Please refer to disclosure link for additional information.}