Fundametrics® Small Cap Equity
1Q 2024 Performance Summary and Observations
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The Fundametrics® Small Cap Value strategy exceeded its benchmark, the Russell 2000 Value Index, by 225 bps for the quarter.
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The fate of small-cap stocks has been tied to the path of interest rates as investors penalize them for having more floating rate debt than large-cap stocks. This was a headwind for small caps during the 1st quarter as the Fed futures curve went from pricing in six cuts to three and the 10-year treasury yield increased by over 30 bps. With rate expectations now in line with the Fed, focus could return to small-cap fundamentals.
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The Fundametrics investment process emphasizes picking the best stocks within each of our peer groups. The model’s effectiveness is shown in the returns of the Alpha Composite throughout the quarter where the Alpha Composite buys beat the sell-rated stocks by over 700 bps.
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The momentum factor played a significant role in first quarter returns. Strong price momentum was an investor favorite, where winners kept winning. Just as important was avoiding bad price momentum. The return spread between high and low momentum was 1250 bps.
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The ability to analyze companies in peer groups allows us to invest in unprofitable biotech / pharma stocks, which is rare in active management. This group returned 19.7%, while traditional healthcare returned -0.07% for the 13-week period ending 3/29/24. Healthcare was the strongest source of the stock selection effect for the portfolio in traditional attribution analysis.
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