The Sector ranks table (based on bottom up aggregation of QMIT Enhanced Smart Betas within sectors) allows for sector rotation based on factors. The cross-sectional factor rank correlations tell us how correlated the factors are at this juncture vs recent 3y return correlations vs LTD (20y) return correlations. It’s worth noting that cross sectional factor rank correlations are based on alphas across the entire universe while the return correlations are only based on the information in the tails (i.e., the 5%-tile spread returns). Further, as the astute may surmise, one can extract a risk model from our factor covariance matrix which should better align one’s alphas with the risk optimization.
- As you can see from the YTD ESB spreads below, the factor landscape came alive with renewed vigor in Aug/ Sept as did the composite signals. It’d previously been moribund YTD stymying the opportunity set for stat arb & EMN quants.
- While Oct was a muted month (with |spreads| < 3.5%) – following the explosive move up in Aug (which looked like a blow-off top for the Momentum complex) and the subsequent Value-Momentum reversal in Sept of historic proportions, Nov did not disappoint in factor land with moves ranging from +2.2% for CSU to -8.4% for Risk.
- With the market at all-time highs & indices up 20-30% YTD, it’s no surprise that shorts have detracted substantially dragging several ESBs down to negative territory YTD. Nov was particularly vicious on the short side for ESBs like RV +11.4%, Lev +8.4% & Risk +7.9%.
- Despite Value’s valiant comeback reversal in Sept (RV was at +2.4% YTD), the Value complex is once again down substantially due to -5.9% during Nov 2019 for RV, resulting in -11.7% YTD while DV posted -1.4% during Nov 2019 with -6.4% YTD.
- Momentum was doing extremely well YTD till the Aug blow off top. It crashed in Sept, came back a bit later on but after -4.0% in Nov, EnMom is now down to -1% YTD with our Pmom at -2.6% YTD.
- Reversals +2% YTD clearly would be higher on daily rebalancing vs the monthly rebalancing that we currently display for all the ESBs.
- Historically, we have not added much value to asymmetric factor cohorts like Dividends because even though our Longs do pretty well, given that ~40% of the universe does not pay dividends (comprising the short side), one cannot expect much discernibility of the ESB on an EMN basis. Again, this year, the Longs are up 20% but the spread returns for the ESB is flat.
- The Quality complex has been marching along steadily this year with Stability at +20.7%, CSU at +15.8%, Profitability at +11.2%, & EQ at 9.0% YTD. That’s why our Qual-Mo composite signal is leading the charge at +14.8% on an EMN basis despite such a strong year for Equities.
- The Stability ESB at +20.7% YTD is the clear winner on the leaderboard. Given the defensive nature of this cohort the constituent metrics like Dispersion of EPS/ SPS estimates as well as the stability of Margins, EPS & CFs etc perform best during periods of turmoil like the Nasdaq crash, 2008 & Q4 of 2018. They have also done well this year due to the recent factor turmoil.
- Leverage was ~-5% on 9/30 & is now at -2.1% YTD. It has not really benefited from the factor turmoil as much as the rest of Quality complex due to the short side.
- Sell-side analysts have delivered this year through ARS at +9.4% & ART +14.2% YTD. These spreads are based on monthly re-balancing & re-optimization which grossly understates the much higher performance attributable to the timely re-balancing of faster moving factors such as ARS & ART which should be re-balanced intra-month especially during earnings season. We will start publishing the performance based on daily rebalancing soon for contrast.
- Despite an extremely strong year for Equities it’s remarkable that the best ESBs this year are the most defensive ones like Stability & CSU. A quick glance at the performance of CSU from 2000-11 confirms our assertion that it does extremely well during turbulent times such as the Nasdaq crash, GFC 2008 & PIIGS 2011 but not so well in a bullish tape.
Please find below heatmaps with the DTD, MTD, YTD, 5 year, Post-07 & LTD returns for our ESBs as of last night’s close. Stay tuned for more ESBs which will continue to be added. These spreads are based on the best methodology (defined as highest cumulative return LTD) out of five that are available to clients for each of the ESBs as regards aggregation of factors within the Smart Beta cohorts. Customized heatmaps may be available based on all five methodologies:
- Equal Weighted
- Max Sharpe Ratio optimization (on an expanding window to prevent look ahead bias)
- Risk Parity optimization (on an expanding window to prevent look ahead bias)
- Top 3 factors based on cumulative return but Equal Weighted (on an expanding window to prevent look ahead bias)
- Top 3 factors based on Sharpe ratio but Equal Weighted (based on cumulative return on an expanding window to prevent look ahead bias)
Sector ranks based on QMIT Enhanced Smart Betas:
C-S Rank correlations for QMIT Enhanced Smart Betas:
3y Return correlations for QMIT Enhanced Smart Betas:
20y Return correlations for QMIT Enhanced Smart Betas:
Sector Ranks are aggregated bottom up average ranks for each of the smart beta composites.
Factor portfolios are not sector neutral.
Generated weekly as of last night’s close this report shows the DTD, MTD, YTD and LTD returns for our smart beta composite spreads.
Factors within the cohort spreads are long-short based on top vs bottom 5%-tile (~125×125) of the largest liquid US traded stocks (usually ~2500 depending upon market capitalization & minimum $ price criterion for stocks listed on NYSE & Nasdaq).
Certain industries like Biotechs and REITS are excluded due to event risk or because a generic quant model is not appropriate for those industries.
Individual factor top & bottom portfolios are equally weighted 5%-tiles. While the combined ESB spreads also represent top vs bottom 5%-tiles they are based on the best (cumulative return LTD) of five methodologies listed above.
MTD returns/ spreads are geometrically chain-linked DTD returns/ spreads where both are based on factor portfolios formed at the prior month end close.
YTD & LTD returns are based on geometric chain-linking of monthlies without transaction costs or fees as is customary in the factor literature.
Multi-period spread returns are not the difference of cumulative top vs bottom returns. Instead, they represent the daily geometrically compounded & rebalancing of the market neutral “active return” differential of the top vs bottom portfolios.
Both Max Sharpe & Risk Parity optimization routines are based on a Hybrid methodology where we 1] find the optimal factor mix within the Smart Beta cohort based on signal blending/ “mixing” but 2] subsequently run the combined ESB spreads outsample on a fully “integrated” basis not just as the linear combination of factor returns.
LTD data commences January 2000.
Enhanced Smart Beta Definitions
ARS: This smart beta composite shows our Analyst Revisions cohort based on measures of estimate revisions, dispersion, Standardized Unexpected Earnings surprise (SUE score) & consensus change in both earnings as well as revenues which can outperform traditional metrics like a 1mo consensus change.
ART: This smart beta composite shows our Analyst Ratings & Targets cohort based on measures of analyst recommendations, target price, changes & diffusion which can outperform traditional metrics like a 1mo consensus change.
CSU: This smart beta composite shows our Capital Structure/Usage cohort based on measures including Buybacks, Total yield, Capex, capital usage ratios etc which can outperform traditional metrics like Cash/MC.
Dividends: This smart beta composite shows our Dividends related cohort based on measures including Yield, payout, growth, forward yield etc which can outperform traditional metrics like Dividend Yield.
DV: This smart beta composite shows our Deep Value (or intrinsic value) cohort based on measures including tangible book & sales which can outperform traditional Book yield.
Efficiency: This smart beta composite shows our Efficiency cohort based on measures including Asset Turnover, Current Liabilities, Receivables etc which can outperform traditional metrics like Asset Turnover.
EnMOM: This smart beta composite shows our Enhanced Momentum cohort which can outperform traditional 12 month price momentum in both return & risk adjusted terms particularly at market inflection points.
EQ: This smart beta composite shows our Earnings Quality cohort based on a variety of Accrual measures which can outperform traditional metrics like Total Accruals.
Growth: This smart beta composite shows our Historical Growth cohort based on a variety of Earnings, Sales, Margins & CF related growth measures which can outperform traditional metrics like 3yr Sales growth.
Leverage: This smart beta composite shows our Leverage related cohort based on measures of Balance Sheet leverage which can outperform traditional metrics like Debt To Equity.
PMOM: This smart beta composite shows our PMOM related cohort which can outperform traditional 12 month price momentum using a variety of traditional momentum factors.
Profit: This smart beta composite shows our Profitability cohort based on measures like ROA, ROE, ROCE, ROTC, Margins etc which can outperform traditional metrics like ROE.
RV: This smart beta composite shows our Relative Value cohort based on measures of EPS, CFO, EBITDA etc which can outperform traditional Earnings yield.
Reversals: This smart beta composite shows our Reversals cohort which is comprised of metrics like short term reversals, RSI, DMA & other technical factors which can outperform traditional metrics like a 1 month total return.
Risk: This smart beta composite shows our Risk/ Low Vol cohort which is comprised of metrics like Beta, Low volatility etc.
SIRF: This smart beta composite shows our Short Interest cohort which is comprised of metrics related to Short Interest and its normalization by Float, trading volume etc.
Size: This smart beta composite shows our Size cohort which is comprised of metrics related to firm size including market capitalization.
Stability: This smart beta composite shows our Stability cohort which is comprised of metrics like Dispersion of EPS/ SPS estimates as well as the stability of Margins, EPS & CFs etc.
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