Venn by Two Sigma April 2023 Factor Performance Report: Low Risk Outperforms and Small Cap Underperforms

One might be tempted to say that markets “bounced back” in April after multiple bank failures in March. However, our Equity Factor and Interest Rates (long bonds) Factors have only posted a negative return in February this year, and were up 7.11% and 2.35% year to date respectively. 

Looking past regional banking headlines, positive signs in April included a better than expected earnings season in the U.S. For example, out of 249 S&P 500 companies that reported through April, roughly 79% posted an earnings surprise better than analyst expectations, with an aggregated surprise of over 7%.¹

Standout performance in the Two Sigma Factor Lens came from Low Risk and Small Cap in April, posting returns in the top and bottom 10% of their history, respectively. Otherwise, risk factors were generally “quiet” in April, with very few cases of outsized performance. 

Source: Venn by Two Sigma. The median and percentile columns measure the performance of each factor in the Two Sigma Factor Lens relative to the entire history of the factor in USD, using monthly data for the period March 1995 - April 2023

• Our Low Risk Factor is a portfolio that is long lower risk stocks and short higher risk stocks. This implies that low risk stocks outperformed high risk companies by over 5% in April. Both low beta and low residual volatility components of our factor were positive in April. 
  
  
  • Beta neutrality is an important design tenet for our Equity Style Factors, which helps to establish independence from broader equity market movements. This includes the Low Risk Factor, such that more capital is typically allocated to the long basket in order to balance equity risk. 

• To fight inflation, central banks have been actively slowing the global economy through rising rates. The expectation of slower growth may be contributing to Small Cap underperformance, as smaller companies are often considered to be more sensitive to falling growth expectations. Notably, the Small Cap factor is the worst performing factor in the Two Sigma Factor Lens year to date, down -4.01%. 

As a separate note from factor performance, we’d like to reshare a piece that reviews the mechanics of financial panics. Authors Mike Nigro and David Cohen of our affiliate, Two Sigma Investments, LP, aimed to provide context after the Covid crash, discussing various characteristics of financial panic such as unwinds, diversification and constraints. This review may be helpful in today's environment, particularly their illustration of bank runs.

REFERENCEs

¹Source: Bloomberg Earnings Features as of 4/30/2023.

References to the Two Sigma Factor Lens and other Venn methodologies are qualified in their entirety by the applicable documentation on Venn.

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