June VFPR

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 - June 2020.

Markets and Factor Summary

Market Themes

  • COVID fears intensified in the latter part of the month. Despite mostly flattening curves in Europe and East Asia, there was a pick up in COVID cases in southern and western states in the U.S.1
  • U.S.-China tensions increased as China enacted a new national security law in Hong Kong. This resulted in the U.S. implementing sanctions on certain Communist Party officials. Other countries took action too, such as the U.K. paving the way for millions of Hong Kongers to apply for British citizenship.2

Factor Performance Summary

  • The global Equity market continued its rally despite the rising COVID cases in the U.S. and increased U.S.-China tensions.
    • The Local Equity factor in the USD version of the Two Sigma Factor Lens suffered, as the U.S. equity market lagged those in Europe and Asia, at least partly due to the mounting COVID cases in certain U.S. states.
    • Emerging Markets by and large fared better than their developed market counterparts, with the MSCI Emerging Markets Index posting 7.35% returns for the month. Emerging market debt and currencies also recorded gains.
  • The Interest Rates factor ended the month in positive territory.
    • Global government bond yields rose early in the month, then reversed course and dropped for the rest of the month. This reversal erased early losses in the Interest Rates factor, which is constructed using a 7-10 year global government bond index.3 Bond prices rise as yields fall.

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  • The Commodities factor was slightly positive in June.
    • The underlying index used to construct the factor, the Bloomberg Commodity Index, was up 2.28% for the month, seemingly due in part to oil prices rebounding as economic reopenings largely continued. Other major commodities, such as gold, were also positive. However, we think that most of those index gains could be attributed to the Equity and Interest Rates factors, resulting in a smaller profit for the residualized Commodities factor in the Two Sigma Factor Lens.
  • In the USD version of the Two Sigma Factor Lens, the Local Inflation factor, calculated using the return difference between U.S. inflation-protected bonds and Treasuries and then residualizing to the core macro factors, delivered 0.73% returns in June.
    • Inflation breakevens, which represent inflation expectations, rose, benefiting the factor.4
  • In terms of the equity style factors in the Two Sigma Factor Lens, there was a reversal around June 8th that affected all five factors:  
    • Negative to positive reversal:
      • Momentum was down -11.45% through June 8th, but then posted a very strong recovery to end the month up 1.74%. Tech names that generally exhibited positive Momentum exposure continued powering the rising equity market.
      • The Quality factor posted -3.87% returns through June 8th. Losses came from the factor’s Leverage, Earnings Variability, and Profitability components. It gained for the rest of June, but did not manage to escape negative territory, ending the month down -2.21%.
      • Low Risk struggled early on with -5.60% returns through June 8th. The factor’s subsequent recovery was not very strong, landing Low Risk with -3.24% returns for the month.
    • Positive to negative reversal:
      • The Small Cap factor was up 2.56% through June 8th. It then fell for the balance of the month, but did not manage to fully erase its early gains, ending June up 0.91%.
      • Value did well, up 7.32% through June 8th. It then sold off over the next 3 weeks, ending June down -1.29%. Value is the worst performing equity style factor this year, down -26.41% YTD through the end of June.
    • In terms of notable macro style factors in the Two Sigma Factor Lens:
      • The Equity Short Volatility factor was negative in June, as the VIX increased nearly 3 points for the overall month.5
        • There was a notable VIX spike on June 11th, which corresponded to a meaningful pullback in global equity markets (the Equity factor returned -4.59% on that day).
        • The increase in U.S. equity market volatility during June is particularly notable given the general rally in equities over the month. The VIX index and the Equity factor have a long-term correlation of -70%.6
      • The Trend Following factor suffered with losses in all four asset classes. The most notable losers were short positioning in commodities and equities, which detracted as both asset classes generally outperformed in June.

 

REFERENCES

Source: Financial Times article “Coronavirus: US states in the west and deep South see rising rates of new cases — as it happened” on June 9, 2020.

2 Source: NPR article “As China Imposes New Hong Kong Law, U.S. And Allies Take Steps To Retaliate” on July 2, 2020.

3 For more details on the Interest Rates factor construction, see https://help.venn.twosigma.com/en/articles/1392786-two-sigma-factor-lens-faq

4 Source: https://fred.stlouisfed.org/series/T10YIE

5 Source: http://www.cboe.com/vix

6 Source: Venn as of July 7, 2020. Time period: August 3, 1999 - June 30, 2020.

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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