Axioma Risk Monitor
AXIOMA RISK MONITOR
Equity edition

Value back in favor, as Momentum crashes in tumultuous week for quants; US Momentum diverges from most peers; Style risk at six-month high for Russell 2000

 

HIGHLIGHTS FOR THE WEEK ENDED SEPTEMBER 12

 
 
 

Value back in favor, as Momentum crashes in tumultuous week for quants

 

In a seemingly quiet week for equity markets, there were huge moves in style factors, with Momentum and Value seeing large reversals. Momentum tumbled in all geographies Axioma tracks closely last week. The US was hit hardest, with Momentum dropping more than 3% last week, wiping out the strong returns of the past three months. The three-month return to Momentum turned negative (-2.3%), while the 6-month return barely remained positive at 0.55% in the US, as of last Thursday. Momentum in Japan has followed a downward trend for the past six-months, with last week’s drop adding to Momentum’s poor performance in Japan—the only region where six-month losses were negative (-2.4%) across all regions Axioma tracks closely. For more details on Momentum’s crash, see our blog post, Momentum nosedives.

On the flipside, Value, which has been out of favor lately, saw a comeback around the globe. Value recorded positive one-week returns in all of Axioma’s medium-term fundamental models, with the highest return in the UK, where it exceeded 0.77%. The question on investors’ minds is whether this rotation out of Momentum and into Value is short-lived or here to stay. For more insight on this question, see our blog post Has the Factor World Gone Mad and Are We on the Brink of Another Quant Crisis?

See graph from the US Equity Risk Monitor as of 12 September 2019:



 

US Momentum diverges from most peers

 

As we have noted recently, a number of US style factors had returns of unusually large magnitudes in September. These outsized returns meant some big changes in correlation. Medium-Term Momentum has become considerably less correlated (or much more negatively correlated) with most other style factors in Axioma’s US4 medium-horizon fundamental model. Momentum’s correlation with Value and with Earnings Yield was around -0.40, and with Market Sensitivity, Dividend Yield and Volatility all around -0.30 as of September 12th. However, Momentum’s correlation with Growth tightened to 0.56 points. The only other factor showing positive correlations (albeit of small magnitude) with Momentum was Size (0.18). Investors tilting their portfolios on multiple style factors may see a big and unexpected impact on their portfolio risk due to changing factor correlations.

See graph from the US Equity Risk Monitor as of 12 September 2019:


 

 

Style risk at six-month high for Russell 2000

 

US stocks extended their gains last week, with small-cap shares rising faster than their large-cap counterparts. The Russell 2000 reported a 4% gain for the week, while the Russell 1000 advanced only 1%. Even with its recent rally, however, the Russell 2000 trails more than 3 percentage points behind Russell 1000’s cumulative year-to-date return of 20%. While both US indices saw sharp increases in medium-horizon risk through August and September, the risk of the Russell 2000 rose faster relative to that of the Russell 1000. Russell 2000’s risk of 18% is now almost 3 percentage points higher than that of Russell 1000, as measured by Axioma’s US Small Cap and All Cap medium-horizon fundamental models.

Style risk jumped after the Russell 2000’s reconstitution at the end of June, and remained elevated through August, only to climb again in September and reach a six-month high last week. The factors that have seen the biggest jumps in risk this month include Growth, Medium-Term Momentum, and Size, which are all positioned at the high ends of their six-month volatility ranges. Market risk has been the main driver of the rise in the total risk of the Russell 2000 over the past month, as style risk boosted it. Industry risk declined slightly, while stock-specific risk (which is only a small part of total benchmark risk) was relatively flat.

See graph from the US Small Cap Equity Risk Monitor as of 12 September 2019:


 

 

 
 
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On the Blog

The Fed’s ‘insurance’ cut? Not cutting it…

The 25-basis point downward move in the Federal Funds Rate target range at the end of July was meant to be an ‘insurance’ cut to support the US economy.

Has the Factor World Gone Mad and Are We on the Brink of Another Quant Crisis?

Many have drawn a parallel between this month and what happened in July of 2007. However, we do not see September 2019 in the same light as July 2007, which prefaced the ensuing demise of quantitative strategies vis-à-vis their fundamental counterparts. History is not repeating itself—though it may be rhyming a bit.

Momentum nosedives

Is Momentum’s sharp reversal an indication of changes in investor sentiment and a turning point for markets?


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