April 2020 Factor Overview
Welcome to the first Style Analytics quarterly monthly global market analysis for Factor Performance. Thanks to the COVID virus’s impact on markets, we decided that it would be helpful to increase the frequency of these analysis documents from quarterly to monthly. This written document is freely available to be shared and quoted so long as all references are sourced to Style Analytics. For reference, the S&P500 was up 12.7% and the FTSE 100 was up 4% in April.
How to read the charts
Throughout this document, you will see several charts similar to the one shown in Figure 1, providing the relative quarterly factor performance for a series of factors in seven distinct factor groups: Value, Yield, Growth, Quality, Size, Volatility and Momentum. This report covers three distinct regions: US, Europe and Emerging Markets.
Figure 1: Monthly performance chart for 23 sub-factors in 7 factor groups for US Equities in April 2020. Source: Style Analytics
Each factor’s performance is based on the relative performance of the top 50% (by market cap) of that specific factor compared to the overall market (the sole exception is the size factor which uses the top 70%). For example, for the first factor, book-to-price, we determine the period’s performance of the basket of stocks with the highest book-to-price values relative to the total market. Each factor is analyzed independently and market and fundamental data are adjusted so that sector-average (within each country) relative data is used and the performance measurement isolates the factor’s contribution to return. For example in Figure 1, stocks with a high book-to-price (i.e. high value stocks as measured by book-to-price) underperformed the broad market by 0.1% on a country and sector adjusted basis.
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April’s markets strongly rallied around the world with gains in the US of 13.4% in Europe of 7.5% and in Emerging Markets of 9.5%. Unlike March, which saw very large factor performance dependence, where differences between factor performance were as much as 10%, the largest difference between any two sub-factors in April was only 2.6% (between Low Gearing, a Quality sub-factor, and 1-year daily Volatility) in Emerging Markets. April’s factor dependence was materially subdued from March’s madness.
US Equities in April
April’s market rally, from a factor perspective, was quite distinct from March’s down-and-back-up ride. Recall in March, as we reported in our Q1 2020 Report, Growth, Quality, Large Caps and Momentum beat the market while Value, Yield and High Volatility underperformed. April rotated away from Quality and Large Cap and toward High Volatility as shown in Figure 1.
As we reported in our recent analysis of factors in crashes and recoveries, the profile shown in Figure 1 is not the typical factor signature expected in a recovery from a recent crash. Although April does favor high Volatility and Small Cap like a typical recovery it failed to reward Value and Yield stocks where typically do much better in recoveries (Note: the yellow bar’s negative return indicates that Large Cap stocks slightly underperformed the market, hence small caps slightly outperformed). The current rally also favors growth stocks after adjusting for industry returns, indicating that Growth’s outperformance is above and beyond the outperformance by technology stocks. The magnitude of the factor over/under performance in April is in stark contrast to the much larger (±5%) factor returns we saw in March and are reminiscent of the sizes we saw in January and February.
European Equities in April
April’s factor performance was just a little bit more typical for a recovery in Europe than it was in the US, although the lack of outperformance by Value stocks raises serious questions about whether this rally is truly a recovery or more of a bi-product of governments’ monetary policies.
European markets, like the US, favored High Volatility stocks with a weak preference for small caps. Value, Growth, Yield and Quality sub-factors were all generally market-like, with no strong outperformance either way. Just as we saw in the US, April’s factor over/under performance was much more tame than March’s. Only High Volatility provided a significant and consistent excess return for European stocks in April.
European equities (+7.5%) gained only about half as much as US equities (+13.4%) did during April.
Emerging Markets Equities in April
Emerging Markets showed the largest outperformance of the three regions with all Volatility and Growth sub-factors posting positive returns relative to the market.
All Emerging Markets sub-factors posted similarly small sized over/under performance to the Developed markets analyzed above except for High Volatility which outperformed by up to 2% in April.
Figure 4 shows that all of the examined regions have a similar profile except for Value sub-factors which underperformed in the US but outperformed in both Europe and Emerging Markets. In April, the only factor group that behaved consistently between the regions was Volatility, which outperformed the already strong markets by 100 to 200 basis points.