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AFL Style Analysis During Periods Of High Volatility

Due to the recent developments globally on the Covid-19 disease and the subsequent drop in equity markets, S&P Market Intelligence has carried out some analysis on previous periods of high volatility and underlying factor/style outperformance/underperformance using our Alpha Factor Library (AFL) tool on our CIQ Desktop.

Our AFL tool breaks styles out into 8 different categories Price Momentum, Historical Growth, Analyst Expectations, Earnings Quality, Valuation, Capital Efficiency, Size, Volatility. (These links are accessible by clients only. If you are not a current client and would like to request a demo, please click here.) We rank equities based on their factor/style score and bucket those equities into 5 equally weighted/M. Cap weighted quintiles.

Looking at the current environment and the daily style returns for March 2020 thus far, we can see that the capital efficient style is outperforming the European market (on a sector neutral and Long/Short Basis) month to date.

Source: S&P Global Market Intelligence as of March 26th, 2020. Charts are for illustrative purposes only.

Isolating the daily returns in table form we can see which styles have outperformed on the days the market had its biggest declines. In particular on March 5th, 9th, 12th and 16th when volatility had the largest declines, capital efficiency outperforms and is the best performing style:

Source: S&P Global Market Intelligence as of March 26th, 2020. Charts are for illustrative purposes only.

Using the AFL Equity screening tool on the desktop we can now drill into the equities in the European region that rank highest on Capital Efficiency:

Source: S&P Global Market Intelligence as of March 26th, 2020. Charts are for illustrative purposes only.

Using the AFL tool one can also look at periods of high volatility that have occurred in the past and isolate styles that have outperformed during those periods, these styles may be deemed defensive in nature. In the chart below we are looking at the European Developed Market between 2006 and 2013, we can see the 8 styles’ performance over the period, with 5 periods of high volatility (the blue bars):

Source: S&P Global Market Intelligence as of March 26th, 2020. Charts are for illustrative purposes only.

When we drill into some periods of high volatility, for instance the global financial crisis in 2008, we can see which styles outperform in these periods. In the graph below, in the initial downturn in the European Market (the black line), we can see the Capital Efficiency style outperforms (on a Sector Neutral, Long/Short Basis) and when the European market starts to recover we can see the Valuation style outperforms (again on a Sector Neutral, Long/Short Basis).

Source: S&P Global Market Intelligence as of March 26th, 2020. Charts are for illustrative purposes only.

During this period of market stress, equities that deployed their capital effectively and efficiently exhibited defensive attributes. Conversely, as the market recovers, equities that exhibit relative value outperformed.

Summary:

Using the AFL tool, you can also:

  • Analyse sector performance during high/low volatile periods.
  • Input your own macroeconomic regimes for analysis.
  • Analyse Long/Short Returns, Top Quintile Returns and Bottom Quintile Returns.
  • Factor Correlation, IC and T Stat Analysis.
  • Analyse Global Indices, Regional Indices and country specific universes.

Using our Alpha Factor Library tool you can also upload your own equity portfolio and run factor and style analysis – click below for a quick tutorial:

Source: S&P Global Market Intelligence as of March 26th, 2020. Charts are for illustrative purposes only.

Please reach out to us if you have any questions and we can navigate you through our AFL or PA solutions specific to your region or mandate.

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