March 2021 Venn Factor Performance Report

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 - March 2021.

Market Themes & Factor Performance Summary

• March was a strong month for the global Equity factor, particularly in developed markets. 
  • European equity markets led as growth expectations improved¹ despite a worsening COVID situation.²
  • In general, equity markets were supported by more fiscal and monetary stimulus. The US for example, passed President Biden’s first stimulus package³ and the Fed maintained its accommodative stance. 
• Global sovereign 10 year yields increased slightly over March, resulting in the Interest Rates factor losing 10 bps. US yields in particular experienced a notable increase with the yield on 10 year Treasurys ending March around 1.75% (rising from 1.46% to start the month, after rising notably in February from a starting point of 1.09%).⁴ This was at least partly supported by higher growth and inflation expectations.⁵
  
  • • Speaking of higher inflation expectations, inflation hedges generally paid off in March with the Local Inflation factor delivering over 3% returns. For more information on this factor, including its construction, what it’s meant to capture, and how it can help explain inflation sensitivity of a portfolio or investment, read our three-part inflation blog series⁶ and/or watch our inflation webinar.
• The USD rallied in March, supported in part by rising rates.⁷ This activity contributed to the Foreign Currency factor in the USD version of the factor lens (which is long G10 ex USD currencies, funded by a short USD position) losing nearly 4%.
• As we reported in the last couple Venn Factor Performance Reports,⁸ the equity styles experienced sizable moves again in March:
  • Low Risk, a factor that struggled meaningfully during the COVID market crisis last year and failed to recover during the rest of 2020, posted one of its best months with a return over 7% (the factor’s YTD performance is now 1.05%, bringing its cumulative return since the start of the COVID market crisis on February 24, 2020 through March 31, 2021 to -33.19%). Both components of the factor contributed, but Residual Volatility far outpaced gains in Beta. This again highlights the sensitivity of factor performance to design choices such as how one defines “low risk.”⁹
  • Value stocks continued their strong recent performance, buoyed by more stimulus, higher yields (particularly benefiting stocks in the financials sector),¹⁰ and the introduction of an infrastructure package in the US.
  • Quality stocks posted gains of 3.04%. Gains from Investment Quality, Earnings Variability, and Profitability outweighed losses in Leverage and Earnings Quality.
  • Crowding was up almost 1%, continuing its recovery from its worst month since at least 2008 in January, during which short squeezes on a number of out-of-favor stocks like Gamestop hurt the factor (see the January 2021 Venn Factor Performance Report for more information).
  • On the negative side, Momentum lost just over 5%, at least partly driven by losses in the technology sector.
• Finally, in terms of the macro styles:
  • Fixed Income Carry continued its poor performance from last month, as higher-yielding government bonds underperformed their lower-yielding counterparts.
  • The VIX dropped 8.6 points over March,¹¹ which benefited the Equity Short Volatility factor, as markets slowly returned to more normal conditions.

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

REFERENCEs

¹Source: https://www.ecb.europa.eu/pub/projections/html/ecb.projections202103_ecbstaff~3f6efd7e8f.en.html 

²Source: https://www.wsj.com/articles/europe-despairs-as-covid-19-vaccine-rollout-stalls-and-pandemic-grinds-on-11616497200

³Source: https://www.cnbc.com/2021/03/11/biden-1point9-trillion-covid-relief-package-thursday-afternoon.html

⁴Source: Trading Economics.

⁵Source: https://fred.stlouisfed.org/series/T10YIE

⁶Part 1: https://www.venn.twosigma.com/vennsights/inflation-series-local-inflation-factor-primer

Part 2: https://www.venn.twosigma.com/vennsights/three-inflation-hedges 

Part 3: https://www.venn.twosigma.com/vennsights/managing-inflation-risk-in-the-current-environment

⁷The US 10 year yield increased the most in March compared to other major government bonds (UK, Australia, Japan, Germany, and Canada). It also ended the month with the second highest 10 year yield in our Fixed Income Carry factor universe (behind Australia).

⁸February 2021: https://www.venn.twosigma.com/vennsights/feb-2021-venn-factor-performance-report-1-0 

January 2021: https://www.venn.twosigma.com/vennsights/jan-2021-venn-factor-performance-report-1 

⁹For more information on how design choices can impact Low Risk factor performance, please read the Two Sigma Street View: https://www.twosigma.com/articles/how-design-choices-impact-low-risk-factor-performance/

¹⁰The iShares Global Financials ETF exhibited a Value beta of 0.62 over the period March 1, 2018 - March 1, 2021. The ETF outperformed the MSCI World Index Net TR in March by approximately 1.3%.

¹¹Source: https://www.cboe.com/tradable_products/vix/ The VIX ended March at 19.4 from 27.95 to start the month.

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