Perfect storm
Value has been struggling for much of this year. Some strategists blame an aging business cycle that hits cheap stocks especially hard. The thinking goes that the sector does best during the early stages of economic expansions, when strong corporate profits will lift even the most chronically underpriced shares.
But given the recent intensity of declines, company- or industry-specific catalysts might have played an outsize role. For example, Micron Technology Inc. has the largest weight in the Bloomberg pure-value portfolio. The semiconductor’s shares plunged 9 percent in June, as Chinese regulators opened a probe and subsequently banned chip sales from the company.
Another possibility: With losses mounting, programmatic traders may have sold their value holdings, prompting larger declines. It’s hard to size up the systematic kingdom, but there is evidence such investors have cut back in general. Equity quants on Credit Suisse’s prime services platform curtailed stock exposure by 7 percent in the second half of June.
AQR is sticking to the market-neutral strategy, which has seen quarters with volatile returns before, according to Friedman. And it hasn’t sold into the downturn.
“There’s been no indication there’s a liquidity-driven reason for why value has underperformed,” he said. “If it were driven by quant selling you would be more likely to see all factors down at the same time. We don’t see abnormal factor performance that would indicate that there’s been liquidation activity.”
For funds heavily reliant on value, some exposure to momentum helped contain the damage earlier in the year. A market-neutral version of the investing style posted positive returns for the first five months of the year, the longest winning streak since 2007, data compiled by Bloomberg show. Then came June: the worst month since April 2016 when tech stocks plunged amid an earnings shortfall.
Momentum is still on the decline this month, unable to support funds weakened by value’s downturn. U.S. market-neutral momentum has lost 0.3 percent in the first six trading days of July, according to a basket compiled by Bloomberg.
“With momentum stocks outperforming for most of this year, many of the long -short momentum factors we track appear stretched on valuations and crowded by active ownership,” BofA equity quant strategists, including Savita Subramanian, wrote in a note last month.
This article was provided by Bloomberg News.