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Qontigo Insight Quarterly — April 15, 2021

Qontigo Insight Q1 2021 Quarterly Risk Highlights: Internal Rotation While Markets Maintained a Steady Upward Path and Risks Diverged

In Q1, most markets continued to build on the gains achieved in 2020, while risk changes were mixed across regions.

Short-Horizon Predicted Volatility

Source: FTSE Russell, Qontigo

  • Changes in risk were mixed in Q1, with STOXX China A 900 seeing by far the biggest increase, more than 38%. Japan, Asia Pacific and AP ex-Japan, Russell 2000 and Emerging Markets all saw proportional increases in (low) double digits.
  • Other markets’ risk fell, with the biggest drop, 37%, or almost 8 percentage points, in the UK
  • The UK is now the lowest risk of the markets we track closely, a sharp reversal from being one of the highest last quarter
  • The Russell 2000 continues to claim the highest-risk mantel, but China’s big Q1 increase moved it from least risky a year ago to second-most currently

US large-cap risk was unchanged in Q1, but US accounted for more risk in the STOXX Global 1800 than its weight in the index would suggest.

US Short-Horizon Fundamental Predicted Risk

Source: Qontigo
Risk figures are based on the Axioma Market Portfolio US-LMS, which represents the broad US investment universe

  • US short-horizon fundamental risk remains far lower than it was a year ago, but is still 30% above its long-term median and in the 74th percentile relative to history

United States Weight and Contribution to Short-Horizon Risk, STOXX Global 1800

Source: Qontigo
Risk figures are based on the Axioma Market Portfolio US-LMS, which represents the broad US investment universe

  • After dropping slightly in Q4 for the first time in two years, US weight in the STOXX Global 1800 ticked back up slightly
  • At the same time, US contribution to overall benchmark risk increased substantially, to a multi-year level only exceeded by the reading last September
  • The gap between weight and risk contribution therefore widened, suggesting a portfolio bet on the US is adding more risk to a global portfolio currently then it was last quarter
  • At the end of 2020 the UK also contributed more to risk than its weight would suggest, but that gap has narrowed to near zero as of the end of Q1

Inflation concerns and the steepening of the yield curve had a substantial impact on equity prices.

Q1 Performance attribution based on the new Axioma Macroeconomic Projection Model

  • The specter of an inflation resurgence and the uptick in long rates that steepened the yield curve had an important impact on equity prices
  • Developed Markets saw a bigger impact from economic variables than Emerging Markets

Both US sectors and style factors entered a rotation

Q1 Sector Risk vs. Sector Return

Q1 vs. 2020 Sector Return

Source: Qontigo

  • In Q1, higher risk was rewarded in sector investing
  • Many US sectors and style factors that were last year’s losers became Q1 winners
  • Style rotation was not quite as pervasive as the sector rotation, although a number of factors with negative returns in 2020 produced positive returns so far this year
  • The factor and sector rotations drove correlations lower and kept dispersion high

Value recorded the best quarter since the second quarter of 2009 in many regions and one of the best ever

Style Factor Return Rankings

*Normalized: (Actual Return – Long-Term Average)/Realized Standard Deviation
**Rank: Percentile relative to long-term history. Bold means top or bottom
Red denotes typically compensated factors with big returns opposite to the long-term average

  • In some regions, the return to Market Sensitivity has been so positive it has flipped the long-term average from negative to positive (in WW4 and APxJP4)!

Multi-Factor Portfolio Returns in Q1

Factor-Based Attribution of Multi-Factor Portfolio Return in Q1

Source: Qontigo

  • Q1 return rankings remain extreme for many factors
  • The Multi-Factor portfolio finally had a good quarter, propelled by several factors

Style Factor Volatility Remains Very High Relative to History

Style Factor Volatility in Axioma’s Worldwide Fundamental Model at Medium and Short Horizons

Source: Qontigo

  • The predicted volatility of many factors in the Worldwide model neared record high levels relative to history at the end of Q1

More Information

For more information, view the recording of our Qontigo Insight™ Quarterly Risk Review – Q1 2021 webinar or download the presentation slides.

For questions or comments about this data, please contact Qontigo Applied Research team.