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Qontigo Insight Quarterly — July 14, 2021

Qontigo Insight Q2 2021 Quarterly Risk Highlights: The “New Normal” is Back to the “Old Normal”(Or BTTON)

by Applied Research Team

Short-Horizon Predicted Volatility: Back to the Old Normal

Source: FTSE Russell, Qontigo

  • In most cases risk at the end of Q2 was less than half its level of a year ago; it fell an addition 20%-30% during Q2 as markets continued to calm down
  • Most components of risk (mainly industry, country, and currency) contributed to the decline
  • The Russell 2000 was by far the riskiest of the benchmarks we track closely, and its risk relative to larger stocks and tracking error to the Russell 3000 remained elevated.
  • China and Japan were also higher risk
  • Australia and Canada have reclaimed their spots as the least risky markets, pushing the UK from lowest risk to third-lowest
  • The STOXX USA 900 currently falls in the middle of the pack; a year ago it was one of the riskiest markets

US Short-Horizon Fundamental Predicted Risk: Back to the Old Normal

  • US short-horizon fundamental risk has fallen to a level last seen in February 2020 – i.e., back to the: old normal”
  • Risk was also below the long-term median (in the 35th percentile) by quarter-end

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

The Impact of Macro Factors Subsided from Q1… but they still accounted for about 40% of return in US and EU

Source: Qontigo

US Sector Data: Relative Riskiness Shifted Back to the Old Normal

  • As we saw across market benchmarks, US Sectors saw risk decrease across the board
  • Last year we wrote several times about how the crisis changed the relative riskiness of sectors, with risk falling for sectors like Info Tech, making it one of the least-volatile sectors while Real Estate and Utilities became two of the most risky
  • Relative rankings reverted by the end of Q2, with Info Tech now the 9th riskiest of 11 sectors (up from 4th a year ago), and declines in risk rank for Financials, Real Estate and Utilities
  • Energy remains the riskiest, although the gap between its volatility and that of other sectors has narrowed

Source: Qontigo

Average monthly asset-return dispersion*: Back to the Old Normal

  • Dispersion is a function of correlation (the lower the correlation the higher the dispersion) and volatility (the lower the volatility the lower the dispersion)
  • Dispersion had been well above average for the past five quarters, but as market volatility fell and sector rotation settled down, dispersion plummeted, despite the very low level of asset correlations. It is now equal to or back below the long-term average in most markets
  • High dispersion is a potential advantage for managers who could successfully distinguish between the winners and losers, as the reward to “being right” is higher than average (but so is the penalty to “being wrong”)

* Cross-sectional standard deviation of monthly returns for stocks included in each benchmark

Source: Qontigo

US Style Returns: Some Were Back to the Old Normal

Source: Qontigo

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

  • Growth and Leverage both had an unusually large magnitude of return in Q2, both positive vs. a negative long-term average
  • After positive return in Q1, Volatility’s return turned more negative than average in Q2, which drove up its risk (in contrast to most other factors, where risk fell this year)
  • Value remained strong, but return was not nearly as high as in Q1, however Earnings Yield had one of its worst quarters ever

US Alternative Factor Portfolios: BTTON

Source: Qontigo

Notes: Returns are scaled to a factor exposure of 1 for comparability. Differences over 1% for the quarter and 2% YTD are highlighted

  • Year to date, Earnings Yield, Profitability and Low Volatility fared better among larger names, while Momentum and Value had better returns in small-cap
  • Momentum, Value, Earnings Yield and Low Volatility also had higher returns when shorting was restricted – that is, they worked better on the long side. Only Profitability was better on the short side
  • In Q2 relative performance reverted to generally being better among smaller names and on the short side – a much more usual occurrence
  • Momentum worked better with less-frequent rebalancing

More Information

For more information, view the recording of our Qontigo Insight™ Quarterly Risk Review – Q2 2021 webinar or download the presentation slides.

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