March, 2023
During February, value factors were additive to the Active Quantitative Equity (AQE) team’s portfolio performance in almost every region across equities. This prompted a series of questions for the team: Would the same observation be made for value style investing more generally? Would a fundamental manager with a value style and a concentrated portfolio also perform well? Not necessarily, we concluded. Stock selection always matters, though. When a factor performs “well” there is always nuance. The way the factor exposure transfers into portfolio holdings matters. Here we will highlight some of the results’ nuances and illustrate how those nuances could lead to decidedly different outcomes for portfolios.
On the face of it, February looked like a month where the performance of value versus growth was not meaningful. In fact, if one was to compare two well profiled market capitalizationweighted (cap-weighted) indices — The MSCI World Value Index (returning -2.92%) and the MSCI World Growth Index (returning -1.87%) — one would conclude that growth outperformed value. From a cap-weighted perspective this observation would be true. However, this picture is clouded by a small number of large, high-profile names, and if evaluated on a more diversified basis, value signals performed quite well.
Keeping in line with the cap-weighted approach that drives index performance, we can compare the market cap-weighted quintile spread return of Value using our proprietary signal. Although the top quintile or cohort of good value names did outperform the broad market, it underperformed the most expensive group by 1.8% (market cap-weighted spread or MC spread in Figure 1). Does this mean that value did underperform growth? Upon further evaluation, we would say no, actually. If we take a more diversified and uniform approach to evaluating the signal strength of Value using an equal-weighted approach, we discover a positive return for the month, up 1.2% (equal-weighted spread or EW spread in Figure 1).
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Global_Equities_Monthly_Commentary-7.pdfFebruary, 2023
Stocks that meet criterion across all themes — Value, Quality, and Sentiment — can help insulate portfolios from market gyrations. Assessing stocks through a robust, multi-dimensional approach is pivotal to building resilient portfolios for the long term.
The Active Quantitative Equity (AQE) team evaluates a broad range of metrics to forge a multidimensional view of stocks, based on key themes of Value, Quality, and Sentiment. We believe that it is important to assess stocks across all three dimensions, preferring names with attractive valuations, high quality fundamentals, and positive sentiment. Stocks that meet all these three criterion give us greater confidence over the long term and help insulate portfolios from sudden and unexpected market pivots.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Global_Equities_Monthly_Commentary-6.pdfJanuary, 2023
Over the course of 2022, the AQE team had plenty of opportunity to analyze sharp drops in the equity market, and shape different views of volatility and equity risk. Broadly, the team was reminded that traditional high risk segments do not always underperform in market drawdowns. This concept was notably demonstrated when Energy stocks outperformed the rest of the market even when the market was down sharply.
Furthermore, we sought to highlight nuances associated with our preference for “low risk” stocks during the year. In 2022 our cornerstone thematic signals — Value, Quality, and Sentiment — pointed toward lower risk names more than was typical in other years. Yet throughout the prior year, we also had a strong preference for Energy stocks (high risk), and generally a negative view on the Real Estate sector. Our team also reflected on the lack of cushion that traditionally lower risk segments like Real Estate, Utilities, and Telecommunications had during last September’s sell-off. The events of September stood out as an unusual drawdown because the relative pay-off to low-volatility stocks was notably lower than is usually the case. Our explanation of why these events played out the way they did is because of the importance of the dimensions that we specified above in predicting stock returns — Value, Quality, and Sentiment measures.
As we look out to 2023, fundamentals, diversification of factor exposures, and retaining high quality or defensive exposures are the themes investors should be focused on in equity portfolios. The equity market drawdown in 2022 creates a valuation cushion as compared to the end of 2021; however, other risks, and the macroeconomic and market conditions that were prevalent last year still abound. Although we may have passed peak inflation, the outcomes of the fine balancing act for central banks globally between inflation, interest rates, and growth risks still need to play out.
With that uncertainty we expect elevated levels of market volatility to persist and Sentiment reversals to be common. We therefore believe it is important to balance exposures within a portfolio — for example marrying Sentiment exposure with Quality and Value factors. Similarly, we favor balancing investments in traditionally low risk sectors with more cyclical exposures rather than betting on one very specific path for the economy. Importantly, this balanced approach enables fundamentals and diversification to guide our stock selection.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Global_Equities_Monthly_Commentary-5.pdfDecember, 2022
When tracked as a standalone signal, sustainability has delivered strong results, over the last three years. In fact, when compared with our core themes (Value, Sentiment, and Quality), sustainability delivered returns almost as high as sentiment and value, but with lower volatility, and delivered a higher return than quality.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Global_Equities_Monthly_Commentary-4.pdfOctober, 2022
The Active Quantitative Equity (AQE) team has been closely examining the September equity drawdown to better understand what was “conventional” versus “unconventional” about it and how these findings inform the AQE team’s process. September’s decline of more than 9% was the eighth worst monthly return for the MSCI World Index in 30 years. Historically, investors concerned about a market drawdown have looked to lower-risk, defensive segments like Real Estate, Utilities, Telecoms, Consumer Staples, and Health Care. And investors concerned about a market drawdown have also typically avoided higher-risk segments like Financials, Materials, Industrials, and Technology.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Global_Equities_Monthly_Commentary-3.pdfSeptember, 2022
The AQE team sees a relationship between improving Conference Call Sentiment and cyclical versus defensive characteristics broadly. The global economy has been stuttering this year, and company management and investors are worried about the impact of inflation and slowing growth on company earnings. It is understandable, therefore, that the majority of the industries with “attractive and improving” quarter-over-quarter CCS scores are non-cyclical or defensive in nature, as they are better able to withstand the current environment. The opposite is true within the “attractive but declining” bucket, where the majority of industries are cyclical and the outlook may be starting to wane.
Among industries with unattractive CCS scores, we again find a relationship with cyclicality; the majority of industries where management is showing less confidence reside in the cyclical space, notably Financials and IT Hardware. However, some industries do not show a relationship between CCS and cyclicality.
The Internet and Direct Marketing Retail, Air Freight and Logistics, and Road and Rail sectors are cyclical but have a CCS factor that is positive and still improving. On the flip side, management in Health Care Technology and Household Product companies, although within naturally defensive sectors, seem less confident about the outlook and demonstrate a declining CCS.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Global_Equities_Monthly_Commentary-2.pdfJune, 2022
By design, the Active Quantitative Equity (AQE) team’s alpha model favors securities with high-quality balance sheets, reasonable growth expectations, improving market sentiment, and attractive valuations. Focusing on these themes can lead to differences over time in the riskiness1 of our most preferred stocks. Because of current market conditions, our most preferred stocks at the moment are, in total, quite a bit less risky than the average stock. In fact, each of the three main themes we focus on — Value, Quality, and Sentiment — are all pointing toward lower-risk names than has been typical for AQE over time (see Figure 1).
By some measures, the Energy sector is high risk; however, we hold a very positive view of that sector overall. How can this be? Let’s take a closer look.
Due to the tremendous increase in both Sentiment and Quality metrics within the Energy sector over the last year, as well as the improving Valuation scores, our model sees the Energy sector — broadly one of the highest-risk segments of the market — as the most attractive of all sectors.
As of the end of May, the Energy sector on average, using our measure of risk, is the second most risky sector, only trailing Consumer Discretionary stocks, the riskiest sector, by a tight margin. While the Energy sector is up over 50% year to date, earnings-per-share (EPS) growth estimates are up over 60% this year, outpacing the index. We think the Energy sector is even more of a bargain than it was at the start of the year. This has led to a decline in the price-to-earnings ratio (P/E) of the sector broadly. As a result, we continue to find opportunities in the sector. A few segments of the Energy sector that we like are highlighted in Figure 2.
Real Estate is another sector that shows how our process, although risk-aware, is not overly constrained by its influence. The Real Estate sector is one of the least risky; however, it ranks as one of the lowest categories from our total alpha perspective. This is largely driven by extremely poor valuation across the board, coupled with varying levels of Quality and relatively average Sentiment metrics. Real Estate has had a challenging year to date — down nearly 15% — while EPS estimates for the sector have been flat. We do not see this trend easing, particularly on
the corporate Real Estate side, as companies move to more remote and hybrid return-to-work models for their workforces.
Although the sector has experienced a slight decline in multiples, we still view the sector as more expensive than other parts of the market. When combined with unappealing Quality and Sentiment scores, our outlook for the sector becomes poor (see Figure 3).
Risk is often associated with a particular sector or segment of the market. In reality, however, risk usually does not appear in isolation. Instead, risk manifests within sectors, industries, regions, or countries (or combinations of these) simultaneously. In assessing risk and its complexities, the AQE team relies on a balanced, disciplined, and diversified bottom-up approach, which allows us to effectively target opportunities as they present themselves — even when views on risk within sectors diverge.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Global_Equities_Monthly_Commentary-1.pdfDecember, 2021
The State Street Global Equity Fund ('the Fund') seeks to outperform the MSCI World ex-Australia Index ("the Benchmark"), before management costs, over a full market cycle of approximately 5 - 7 years, with lower volatility than the Benchmark. It also seeks to mitigate currency risk associated with the Benchmark.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/factsheet-au-en_gb-sst0050au.pdfJanuary, 2021
Global markets were slightly down in AUD terms in December 2020. From a sector perspective, Utilities and Real Estate fell the most while IT and Discretionary was marginally positive. The rotation into Value stocks that began in November took a breather in December, although the intensifying ‘blue wave’ in the US is setting the scene for further rotation into cyclicals and value.
The State Street Global Equity Fund outperformed the broader index in December. From a sector perspective, positive contributions from Industrials and Utilities were more than offset by negative stock selection within Staples and Discretionary. Currency hedging gained +2.3% as the AUD rose 3.5c to $0.77 on higher commodity prices and risk-on sentiment. Over the past 2 years, underperformance has been driven by investor’s preference for “growth at any price”; and detractors came largely from two cohorts – the very expensive (where we are underweight) and the very cheap (where we are overweight). Having a lower risk bias also hurt performance, as investors tried to front run the ‘re-opening trade’ post COVID-19 sell-off and post vaccine announcement.
The strategy aims to minimise total portfolio volatility and as part of achieving that objective we have avoided the riskier, most expensive, high sentiment segments of the market that harbour higher valuation risks.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Global_Equities_Monthly_Commentary.pdfasset_class: Foreign Equity
asset_category: Large Blend - Quantitative
peer_benchmark: Foreign Equity - Large Quantitative Index
broad_market_index: Developed -World Index
manager_contact_details: Array
ticker: SST0050AU
release_schedule: Quarterly
commentary_block: Array
factsheet_url:
https://www.ssga.com/au/en_gb/individual/mf/funds/state-street-global-equity-fund-sst0050au
Documents ->
Insight & Resources ->
Monthly OR MARKET Commentary
fund_features:
State Street Global Equity aims to outperform the Benchmark over a full market cycle of approximately 5 – 7 years, with lower volatility than the Benchmark. It also seeks to mitigate currency risk associated with the Benchmark.
- The Fund invests in listed global equities selected from the Benchmark and excludes companies, subject to materiality thresholds identified by MSCI, involved in tobacco and controversial weapons.
- The Fund uses derivatives in the form of forward contracts to manage foreign currency exposure.
- The Fund is intended to be suited to investors who: • Seek long term capital growth, but with a lower risk profile than the broader global equity market index; and • Are prepared to accept some volatility in investment returns.
structure: Managed Fund