Value Disguised as Momentum
JAMIE VICECONTE
CHIEF MARKETING OFFICER
CO-CHIEF INVESTING OFFICER
2 min read
It was another month of divergent returns across sectors of the Equity markets. ETFs with a focus on US and International Developed (“DM”) Small-cap and Value-oriented companies were up anywhere from 2% - 7%, while US Large-cap ETFs with a Growth orientation posted marginally negative returns of 1% – 1.5%. With a lot of noise across geographies and sectors, those results are broadly the reverse of April’s performance. So, the back and forth relative performance of Value and Small-caps and DM versus US Large-caps continues, with the former still outperforming the latter handily year-to-date (“YTD”) and since November 2020.
What is occurring “under the hood” of the Factor strategy that has shown the best long-term performance, Momentum, shows how Equities with Value and Growth labels can converge. Driven by the strong performance of the Value factor and relative weakness of Growth for the past six months, the MSCI Momentum indices and the ETFs that are based on them, specifically MTUM and IMTM for the US and DM markets, respectively, rebalanced into securities with higher Value and lower Growth characteristics. These two ETFs make up about 14.75% of our Equity portfolio allocations and are each the largest percentage allocations at roughly 7.4%.
While the one-way turnover of roughly 2/3rd at MSCI’s May 2021 Semi-Annual Index Review was higher than historical averages, the indices rebalanced into securities with higher momentum characteristics, as expected. Therefore, this rebalancing resulted in higher Value and lower Growth exposure.
The gradual reopening of economies since the announcement of a COVID-19 vaccine in November 2020 marked a turning point in the performance of many Factors, as we have discussed in previous notes. More specifically, all Value factors showed strong performance over the last six months, compared to the year prior, across the US and DM. In contrast, considerations such as higher inflation expectations have hurt the performance of Growth companies.
As such, exposure to the financial sector increased significantly owing to its strength in the first quarter of 2021. In contrast, consumer discretionary, health care and information technology were laggards in the US and DM, resulting in lower weightings in the respective MSCI Momentum indices. We highlight this to emphasize the dynamic, yet rules-based nature of what might appear to be “passive” ETFs that we use to construct our portfolios and how they capture relative performance and Value trends in the broader markets.
Equity exposures outperformed their MSCI All Country World Index (“ACWI”) benchmark by about 0.75% for May, leaving them up approximately 12.375% YTD and roughly 1.875% ahead of the benchmark. In the Fixed Income markets, core sector ETFs were up or down 1%. We are using a small allocation of commodity ETFs (GCC for our portfolios) as an offset or hedge for low-yielding bond markets, all of which were up 2.5 – 3.5% in May. Offsetting that, our US Utility ETFs (VPU and XLU) were down by 2.4%. Our overall Fixed Income performance matched the Barclays Aggregate Index (“AGG”) at roughly 0.30% for May and is still ahead by about 3.3% YTD.
