Image 1Source: 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 - November 2020.

Market Themes & Factor Performance Summary

  • The big story of the month and major catalyst for the exceptional global Equity market performance was optimism around COVID-19 vaccine development.1 The Equity factor had its best month on record since the inception of the factor lens in March 1995. The next highest month was April 2009 when the factor returned 10.60% as the world emerged from the depths of the Global Financial Crisis.
  • Global government bonds managed to eke out a small gain in November, with the Interest Rates factor posting 0.11% returns. In terms of country/regional attribution, European bonds led the pack with 2.51% returns on the 10 year Euro-OAT. Australian, British, and Canadian government bonds were all marginally lower.
  • The underlying input for the Commodities factor returned 3.51% in November. All sectors were positive except for precious metals, with gold down -2%. However, once Venn removed the risks that Commodities shared with Equity and Interest Rates, the residualized return that corresponds to marginal Commodities risk was negative.
  • The residualized Local Inflation factor posted a -1.58% return. This result means that an inflation hedge (above and beyond the hedges embedded in the core macro factors) struggled in November.
  • While the absolute returns of U.S. equities were generally in line with that of global equities, on a risk-adjusted basis U.S. equities underperformed, resulting in a -1.13% return for the Local Equity factor.
  • Trend Following was the leader of the pack for the macro style factors in November. Trend following in currencies and equities delivered over 1% returns each, far outweighing small losses in fixed income and commodities trend following.
  • In terms of the equity style factors:
    • As we mentioned in our intra-month report, November saw a notable rotation out of Momentum stocks and into Value stocks due to the positive vaccine news, which brought hopes for a light at the end of the COVID-19 tunnel. Specifically, those stocks that had benefited most from the pandemic-induced economic slowdown (e.g., technology stocks) meaningfully underperformed in November. And cyclical, beaten-down Value stocks outperformed. 
      • As shown in the line chart below, the rotation primarily happened from November 6-10. The cumulative return spread between Momentum and Value was relatively stable for the remainder of the month. 

Image 2

    • The other four equity style factors were negative in November, with Low Risk, Quality, and Crowding suffering the largest losses behind Momentum.
      • Low Risk was down -4.08% with both of its major components, Beta and Residual Volatility, detracting. Bullishness around vaccine optimism was a major driver away from “defensive,” lower-risk stocks, similar to the driver behind the sell-off in Momentum. In fact, recent correlations between the two factors are elevated:

Image 3

      • Heavy losses from Profitability, Earnings Variability, and Leverage more than offset gains from Earnings Quality and Investment Quality for the Quality factor.
      • The Crowding factor saw -1.55% losses, perhaps indicating that active equity managers rotated out of positions due to the positive vaccine news. This factor move was very large compared to history (especially given the factor’s low volatility); in fact, only four months were worse than November since the factor’s inception in 2008.


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REFERENCES

1https://www.pfizer.com/news/press-release/press-release-detail/pfizer-and-biontech-announce-vaccine-candidate-against

https://investors.modernatx.com/news-releases/news-release-details/moderna-announces-primary-efficacy-analysis-phase-3-cove-study

https://www.astrazeneca.com/media-centre/press-releases/2020/azd1222hlr.html

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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