Of Special Interest ...examining a significantly timely topic

With an abundance of year-end updates in this edition of Perception for the Professional, we plan to release the content for this “Of Special Interest” section separately in mid-January.

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Momentum is one of the most widely accepted alpha-generating factors, used by quantitative and fundamental managers alike. Its biggest drawback, however, is high turnover. Herein we explore momentum from the perspective of sector weights.

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Market history teaches us that investors behave differently in groups than they do as individuals.

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A fascinating aspect of long-running bull markets is the emergence of money-spinning strategies that come to be seen as “sure things.”

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Our Major Trend Index (MTI) recently fell from “positive” toward stocks to a “neutral” reading, leading us to trim bullish equity positions in our tactical portfolios.

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Relative performance of active and passive mutual funds is one of the leading story lines in our industry, with passive’s recent advantage leading some to argue that it will be the dominant style forevermore. We disagree, and believe that the active/passive relationship has been, and always will be, cyclical.

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In April 1964, the Beatles simultaneously held the top-five spots on the Billboard Hot 100, a unique feat in the history of modern music.

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Investment factors experience performance cycles just like every other asset and index. The Value factor is robust across definitions, as all eight versions produced positive excess returns under long/short and long-only methodologies.

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Despite real GDP growth of just 1.6% in 2016, the median S&P 500 company earned a net profit margin of 9.7%, only 40 basis points below the record high established in 2014.

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We examine past capex spending patterns and identify industries with sales growth rates that have historically been the most responsive to capex cycles.

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Profitable investing overseas requires not one, but two, successful decisions: 1) select an outperforming asset class; and, 2) be in a currency that provides a favorable foreign exchange impact.

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While factors do offer excess return they are by no means winners in all seasons. Our findings show that factor returns are cyclical, volatile, and unstable over time.

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Long-term debt (LTD) issued by S&P 500 companies has risen 75% since 2010, and the resulting deterioration in leverage ratios has been all too evident.

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Factor performance during 2016 is the reverse of that of 2014-2015. Quants and smart beta funds focusing solely on Value have enjoyed the year, while multi-factor approaches have struggled. Value has been the only factor that has provided positive performance this year.

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Also known as smart beta or strategic beta, factor investing has become the hottest portfolio management trend in the last five years. The smart beta space exceeds $600 billion in assets under management.

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A client inquiry led us to take a fresh look at the relationship between current valuations and subsequent stock market returns, which is a regular feature in our Benchmarks publication.

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The impact of atypically-high current valuations has become a challenge for style-box investing. High quality, mature dividend payers have habitually resided in the Value and Blend boxes, but investors have bid up those valuations as they look for alternatives to low bond yields.

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On August 31st, Real Estate will become the newest GICS sector and the first Level 1 addition since the framework was unveiled in 1999—REITs had been classified as an industry under the Financials sector.

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Different measures of value may tell different stories. Using various metrics, we examine the valuation of Large Caps, Small Caps and equity sectors.

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The Leuthold Materials sector jumped five spots to #3 in the June Group Selection (GS) rankings, its highest ranking in eight years and the first reading outside of the bottom four in almost four years.

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