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 - October 2021.
Market Themes & Factor Performance Summary
- Global Equity markets rebounded from poor performance in September to end October as the best performing factor in the lens. The factor was supported in part by strong corporate performance, which benefited from post-lockdown demand.
- The U.S. in particular was an outperformer, boosting the Local Equity factor. The MSCI USA Index ended the month up 6.95%, resulting in risk-adjusted outperformance relative to global Equity markets of 1.43%. The U.S. is still recording strong earnings results (although not as strong as last quarter), particularly from the tech sector. Approximately 80% of the companies in the S&P 500 that have reported Q3 earnings so far have beat estimates.1
- The Interest Rates factor struggled in October, as bond markets reacted to expectations of persistent inflation and began pricing a faster pace of central bank tightening. In related news, yield curves flattened (shorter-term yields rising more than longer-term yields), especially in the last week of the month, as markets grappled with concerns over future economic slowdowns and reduced central bank accommodation.
- Fixed Income Carry, a macro style factor that is designed to be duration neutral and represent exposure to a relatively simple carry strategy in fixed income markets, exhibited extremely poor performance. Higher-yielding government bonds (like Australia)2 underperformed, while lower-yielding bonds (like Japan) outperformed. This resulted in the factor delivering one of its worst performances since its inception in the lens (2nd percentile). It now is down a little over 8% for the YTD period through October. Managers that implement carry strategies in their fixed income books may have experienced pain from exposure to this factor in October.
- In terms of the macro style factors:
- Unlike what we observed for carry in fixed income, the Foreign Exchange Carry factor delivered positive returns. Higher-yielding currencies like AUD and NZD outperformed, and lower-yielding currencies like the JPY (and the EUR to a smaller extent) meaningfully underperformed.
- The Equity Short Volatility factor was another notable performer within this factor group. A meaningful drop in the VIX of nearly 7 points (from 23.14 to 16.26) resulted in a positive return for the factor, as it tends to benefit when U.S. equity market volatility falls.3
- In terms of the equity style factors:
- The Momentum factor was a steady gainer throughout the month, ending up 3.73%. The factor was supported in part by continued strength in the Information Technology and Consumer Discretionary sectors.
- The Quality factor was another top performer, delivering gains in four out of five of its components. The lone detracting component was Earnings Quality.
- Small Cap was the worst performing equity style factor. Small caps underperformed their large cap counterparts, hurt at least partly from (i) the previously mentioned yield curve flattening and (ii) the reflation theme losing steam as central banks confronted inflation with hawkish policy. For example, in the U.S., the Russell 1000 outpaced the Russell 2000 by 2.7%.4
References to the Two Sigma Factor Lens and other Venn methodologies are qualified in their entirety by the applicable documentation on Venn.
2Example sources: https://www.ft.com/content/68e5f968-a95f-41f6-a08d-c5f5c0ad1841 and https://www.reuters.com/article/australia-stocks-close/australian-shares-fall-bond-yield-soars-on-rate-hike-fears-idUSL4N2RO1TM
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