Today, we’re going to wrap up our series on Value in the real-life context of a massively volatile and beaten down market. We’d like to start by noting that after the turbulence of the past few weeks, our Global Market factor is flagged as “Extremely Oversold” at -2.9 standard deviations below the mean:
While conditions still seem to be normalizing, a good deal of fear and concern abounds - and we’re certainly not calling an end to the volatility. As far as we know, it might take months for us to fully understand the economic and market ramifications of the COVID-19 outbreak that led the Fed to cut rates by 50bps on Tuesday.
This chart shows us how the top quartile of Value names have really been driven by financials, with exposure to Banks nearly doubling over the past decade. We also see that Insurance was the biggest sector earlier on, although it has come down over time. Equity REITs have seen an increase as well, although they peaked in 2018 and have since fallen a bit. Oil & This portfolio’s exposure to Oil & Gas names also nearly quadrupled in 2015, with the industry remaining a top 3 exposure.
Here’s how the current sector exposure of the new portfolio measures up against the original Value - Top Quartile portfolio:
Through this adjusted selection process, we were able to effectively neutralize the excessive exposure to Banks, Insurance, and Oil & Gas, while adding exposure to industries like Internet Software and Life Sciences (industries one might not typically assume would be found in a Value portfolio).
Here’s what Value and Growth exposure looks like for the Top Quartile basket vs. the GICS3 Diversified version:
Obviously, when removing many of the names (i.e banks) from our Value basket, we’d expect to see Value exposure come down. We also see that exposure to Growth has remained fairly consistent between the two. Thus, we see that by using the diversified basket we are still able to create a Value vs. Anti-Value play, without sinking a disproportionate amount of dollars into the top Value sectors. Next, we’ll see how these baskets have performed.
The Value - Top Quartile basket slightly outperformed Value - GICS Diversified over the past decade, although the difference in annualized returns was a meager 13bps. We also see that the diversified version was far less volatile (with nearly 6% less annualized vol). We also note a higher Sharpe in the new basket, as well as a lower max drawdown. Most importantly, we were able to accomplish this without taking on any outsized industry bets.
If we look at just sector contribution to performance, we can see that the diversified basket outperformed the top quartile by nearly 29% over the past decade. This is because exposure to Oil & Gas was taken down, while exposure to sectors like Biotech was also taken on.
US & Global Market Summary
US Market: 2/28/20 - 3/05/20
Factor Update: Axioma US Equity Risk Model (AX-US4)
Factor Update: Axioma Worldwide Equity Risk Model (AX-WW4)
Please let us know if you’d like to discuss Value in more detail or if you’re interested in building other thematic baskets using Omega Point’s Security Search tool.