Source: Venn. 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 - August 2021.
Market Themes & Factor Performance Summary
- August was a relatively quiet month in terms of factor performance in that only three factors exhibited notably positive (i.e., greater than 80th percentile) performance relative to their long-term monthly averages. And no factors exhibited notably negative (i.e., less than 20th percentile) performance. Let’s start by discussing the factors on the positive end of the spectrum:
- The global Equity factor was the best performer in August, returning 2.61%. Strong economic data combined with mostly continued economic reopenings outweighed concerns over the fast-spreading delta variant. Near the end of the month, the Equity factor was further supported by the market’s dovish response to Powell’s Jackson Hole speech.
- The Emerging Markets factor, which is residualized to all four of the core macro factors, bounced back after posting poor performance in July. In August, the factor was boosted by all three of its underlying components: emerging equities, bonds, and currencies. Emerging equities were the top performer of the three components, initially losing on virus concerns and increased China regulation (as covered in last month’s report), but eventually rebounding in the last couple weeks of August to end up 2.62%.
- Finally, there were three style factors (one macro style; two equity styles) that posted noteworthy positive returns in August.
- Despite a close-to-flat return for the global Interest Rates factor, there was variation in global government bond performance that the macro style Fixed Income Carry factor (which is designed to be duration-neutral) was able to capture. The factor was long the higher-yielding government bonds, like those of Canada and Australia, that outperformed in August, and was positioned short the lower-yielding bonds, like those of Europe and the UK, that underperformed. Canadian and Australian bonds outperformed at least partly on concerns over the delta variant. Canada, as a major commodities producer, is sensitive to China’s exposure to the variant and its impact on demand, while Sydney was in a lockdown due to a delta outbreak.1
- The long-short Momentum equity style factor gained in August, as recent winners continued outperforming recent losers. The factor is still recovering from losses earlier in the year, and its YTD return now sits at -4.23%.
- The Crowding factor continued its positive performance from last month, ending August up 0.84%. This suggests that stocks that were heavily shorted by the investment community underperformed those that weren’t as heavily shorted in August. The factor’s YTD return is 2.31%.
- Finally, we’ll provide some brief comments on the factors that performed mildly negatively in August:
- The Credit factor ended the month in negative territory. The underlying input (a mix of investment grade and high yield corporate debt in the US and Europe) was effectively flat in August, but the factor’s residualization to Equity and Interest Rates pulled the factor below zero.
- The Commodities factor also ended August lower. Here we saw the factor’s underlying input (the Bloomberg Commodity Index) experience a negative return, with losses in metals (both industrial and precious) and energy detracting.
- The USD, supported in part by strong economic data, outperformed other G10 currencies in August, resulting in a negative return for the Foreign Currency factor in the USD version of the factor lens.2
- Inflation expectations decreased slightly in August, which contributed to the Local Inflation factor’s negative return.3
- Small Cap was the worst performing equity style factor in August, continuing its poor performance from July. Large cap companies outperformed their small cap counterparts. In the US, for example, the Russell 2000 Index underperformed the Russell 1000 Index by around 0.7%. The Small Cap factor’s YTD return is now -1.72%.
References to the Two Sigma Factor Lens and other Venn methodologies are qualified in their entirety by the applicable documentation on Venn.
1Sources: https://www.reuters.com/article/canada-forex/canada-fx-debt-canadian-dollar-falls-as-delta-variant-weighs-on-oil-idUSL1N2PA122 and https://www.bloomberg.com/news/articles/2021-08-19/australia-unemployment-unexpectedly-declines-as-economy-holds-up
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