The Rotation Continues
JAMIE VICECONTE
CHIEF MARKETING OFFICER
CO-CHIEF INVESTING OFFICER
2 min read
MSCI, which we reference for their All Country World Index ("ACWI") as our global Equity benchmark, offers a myriad of relevant indices, starting at the country level and then splintering into an ever-widening array of sub-groupings. While many ETFs precisely capture these sub-groupings, other index providers support an ever-growing universe of ETFs. There are many Factor-based products to choose from, and keeping up with their construction and performance has become a bit of a daunting task.
Selecting the best-in-class ETFs to capture the Factor exposures we want in the portfolios is a priority. We made some changes to portfolio holdings in our quarterly rebalancing last week with that in mind, subject to tax considerations. And we make those selections somewhat agnostic to relative historical returns across our selection options by geography and Factor.
The rotation trade we discussed last month continued in March, and our updated allocations tilted the portfolios more towards the strength of Value over Growth and small over large-cap ETFs across geographies. The extent of this reversal to date is evident in the performance of broad subsets of the S&P 500 Index. In 2020, the top 25 stocks in that index, which were up a median of 97%, have had a median return through March 30th of -3%. Meanwhile, the bottom 25 stocks in that index, which were down a median of 43% in 2020, are up a median of 32% year-to-date ("YTD"). And it is fair to say that those top stocks of 2020 were Growth names versus the Value names that have outperformed YTD.
We would hope that examples like this impart some fundamental investment axioms on investors. First, it is not timing the market, but time in the market. And second, it is equally important to stick with a sound strategy supported by long-term historical performance. While many (long-suffering) Factor-investors were frustrated by lagging performance over the past few years, no one could accurately predict when the turn came – and it finally did in the 4th quarter of last year.
Our Factor-based Equity strategy has outperformed its ACWI benchmark by roughly 2% YTD, albeit with a significant amount of inter-day volatility. That leaves equity returns at about 6.5% YTD. This recaptures some of last year's underperformance. Hopefully, as our commentary shows, this is an intermediate to long game, and short windows of performance don't tell the whole story.
For balanced accounts, the Fixed Income markets remain challenging with low yields and what appears to be an asymmetric risk to rising rates. As was the case in February, return attribution for our strategies' total return component consisted of gains in short-duration credit exposures offset by losses in intermediate duration exposure, including US Agency bonds. The balance of our exposures in short-duration High-Grade bond ETFs was unchanged in value with our relatively small allocations to commodities (GCC) and utilities (VPU and XLU), providing some boost to returns.
