Fundametrics® Small Cap Equity

2Q 2023 Performance Summary and Observations

  • The Fundametrics® Small Cap Value strategy finished the quarter slightly below the the Russell 2000 Value Index.
  • The Fed appears to be in the final innings of raising rates, the economy continues to be resilient with strong employment and banks have stabilized for the time being. Investors saw these signals as a green light to get more aggressive, putting high beta atop the Fundametrics factor leaderboard for the quarter. High beta stocks have outperformed low beta by 1600 bps year-to-date. As of the end of the quarter, the portfolio is overweight low beta stocks relative to high beta.
  • The information ratio of the strategy over the last 10 years is in the top 5% relative to Small Cap Value peers (source Morningstar). This implies a portfolio with consistent excess returns relative to risk. Investment success isn’t defined only when a manager is in favor, but also how they perform when tides swing against them. It has been a grind in the YTD environment of high growth / high valuation / higher risk and alpha has been tough to generate for this strategy, but it is largely tracking the benchmark. The Alpha Composite buy-rated stocks provided some discrimination this quarter, but the Financial Warnings model kept the portfolio underweight some of the best performing, higher risk names.
  • The market environment appears favorable for Small Cap Value stocks. The Fed is close to peak rates and the broad market, outside of the largest capitalization names, contains attractive valuation. Small-cap P/E multiples suggest investors continue to price in significant recession risk. Since 2006, median one-year returns for the small-cap investable universe and Russell 2000 Value Index have been positive following these types of environments without experiencing a single down year.

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