As we near the end of a painful year that will also surely rank as among the most bizarre ever for the investment community, we might all be wondering what else 2020 can possibly throw at us? Well, don’t hold your breaths too long given that soon we may be experiencing a growth vs. value rotation within the mix, as we are beginning to see the characteristics of growth and value hit uncharted territory. In 2020, we’ve seen already seen a COVID-induced Volatility reversal, and a vaccine-induced Momentum crash, so why not add Growth and Value rotations to the rest of the fun we had in 2020?
Source: JP Morgan iDex US Growth Index, JP Morgan iDex US Value Index
Methodology for JP Morgan iDex US Indices
The JP Morgan iDex US Indices are constructed using the MSCI USA and the MSCI Barra Global Equity 3 risk model factor exposures for the Value and Growth factors. After applying various investibility screens to the MSCI USA universe, the top 100 securities by Value and the top 100 securities by Growth are selected and rebalanced monthly to form the constituents of the JP Morgan iDex US Value Index and JP Morgan iDex US Growth Index, respectively.
We can see that contrary to typical value and growth indices, the JP Morgan indices avoid the expected sector biases. In particular, the Growth Index is underweight the usual “growth” sectors of Information Technology and Communication Services and overweight the usual “non-growth” sectors of Industrials and Financials relative to the Russell 1000 Growth. Similarly, the Value Index is underweight the usual “value” sectors of Financials and Industrials and overweight the usual “non-value” sectors of Information Technology and Health Care. This indicates that the JP Morgan indices are gaining the appropriate growth and value tilts not just by taking major sector bets, but rather by representing true growth and value styles.
The JP Morgan indices range from about 0.2 - 0.85 overexposure to Growth and Value factors, respectively, relative to their Russell 1000 style counterparts. We also tested these indices against several other Russell Style Indexes (Mid Cap, 2000, and 3000) and observed similar overexposures.
The DNA of Growth vs Value
Now that we have a good understanding of the JP Morgan style indices, we can use these, along with other key factors from the Axioma US 4 Medium Horizon risk model to understand the drivers of the recent behavior in growth and value. We evaluated all of the style factors from the Axioma model and found that the Market Sensitivity and Volatility factors tell a lot of story when considering the behavior of growth vs value.
Of note here is that the levels of Volatility exposure within the two indices converges in 2016 and 2018 and even reverses in 2019. However, we now can see that the Volatility exposure spread of these indices, currently at 0.61 (Growth minus Value), is at the highest level that it has been since 2007! This is driven by Volatility having higher representation within growth and lower representation within value than ever before in this time period.
Again, we see that the Market Sensitivity exposure spread of these indices hit the lowest point in the period since 2007 coming out of the March 2020 downturn, with a -0.79 exposure spread in May 2020. Though some of this extreme negative spread is caused by lower Market Sensitivity exposure within the Growth Index, we see a much larger portion of the negative spread is caused by a major spike in this exposure within the Value Index.
Implications on Stock Picking Opportunity
The last step in our analysis takes us look at the predicted risk characteristics of the JP Morgan style indices. Intuitively, we know that we are in a very challenging time for active stock pickers, but we can use idiosyncratic risk as a proxy to quantify this effect.
The same chart shown for the JP Morgan iDex US Value Index vs the Russell 1000 Value shows paints a tougher picture for value.
We know that stock picking opportunities tend to be a bigger challenge in value as compared to growth, which can be quantitatively observed, especially for recent periods, in the very low levels of idiosyncratic risk for the Value Index in comparison to the Growth Index. The Value Index had a low point of 4% in April 2020 and currently has a level of only 10%. However, again, we see an uptrend in the level of idiosyncratic risk, similar to what we saw post-Global Financial Crisis, that may signal easier stock picking opportunity ahead for the value world.
US & Global Market Summary
US Market: 11/23/20 - 12/04/20
Normalized Factor Returns: Axioma Worldwide Equity Risk Model (AXWW4-MH)
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