U.S. Equity Style Dashboard: Continue To Favor Value And Quality

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Includes: MTUM, QUAL, USMV, VLUE
by: FundGuru

Summary

Using MSCI USA factor-based indices, we slice and dice the U.S. market into 4 neighborhoods.

Value stocks extended its run in March, outperforming the broad market and other neighborhoods.

We continue to recommend an overweight to stocks with Value and Quality characteristics.

Introduction

This is part of a series of monthly articles that provide readers an insight on the best U.S. equity market "neighborhood" to pick stocks from, in order to maximize the chance of outperforming the broad market in the short- and intermediate-term.

The four neighborhoods are:

  1. Value
  2. Momentum
  3. Low Volatility
  4. Quality

For a more in-depth discussion of each neighborhood, and how factor indices can help investors screen for stocks, please refer to our introductory article titled "Choosing The Right Neighborhood: U.S. Equity Style Dashboard - Feb'16".

All returns in this article are calculated through March 31, 2016, and are presented in total returns.

How To Use Our Graphs

On each graph, we show the following:

  • Rolling 6-month ("R6M") cumulative performance of the factor "relative" to the MSCI USA, a broad market index; This represents short-term price momentum
  • Rolling 3-year annualized ("R3Y") performance of the factor "relative" to the MSCI USA, a broad market index; This represents intermediate-term price momentum

The best time to rotate in, or out of a neighborhood is when the current observation sits at an extreme, i.e. at -1 (lower bound) or +1 (upper bound) standard deviation. This is when it carries the most predictive power.

Readers can use this information to inform their investment decision marking when buying individual, or groups of stocks.

1. Value Neighborhood

  • Value stocks returned +7.1% in March, bringing its return to -0.4% YTD
  • Value stocks extended its lead in March, beating all 3 other neighborhoods, as well as the broad US equity market
  • We expect outperformance to continue in the short-term, as R6M returns remain very depressed relative to history
  • We are also constructive on this segment of the market in the intermediate-term as R3Y is at present sitting at the historical mean

For transparency, these are the top 10 holdings in the VLUE ETF:

For the full list, please navigate to this page.

2. Momentum Neighborhood

  • Momentum stocks returned +5.3% in March, bringing its return to +0.1% YTD
  • Momentum stocks lagged Value, Quality and Low Volatility stocks in March; It also underperformed the US broad market index
  • We expect underperformance to ease in the near-term, as price momentum for the group is now neutral on a R6M basis; That said, this group of stocks can continue to lag if markets take a turn for the worse
  • Over an intermediate-term, we believe momentum stocks will fare poorly given its returns remain elevated on a rolling 3-year basis

For transparency, these are the top 10 holdings in the MTUM ETF:

For the full list, please navigate to this page.

3. Low Volatility Neighborhood

  • Low volatility stocks returned +6.0% in March, bringing its return to +5.7% YTD
  • Last month we highlighted that low vol stocks are overbought, and in line with our observation, this group of stocks indeed fared poorer in March, and underperformed the broad market
  • We expect underperformance to continue in the short-term, as R6M price momentum for the group is still overbought
  • Over the intermediate-term, we remain neutral on this segment as current R3Y returns are not elevated relative to history
  • Low volatility stocks will likely prove more defensive in the event of a market drawdown

For transparency, these are the top 10 holdings in the USMV ETF:

For the full list, please navigate to this page.

4. Quality Neighborhood

  • Quality stocks returned +6.3% in March, bringing its return to +1.2% YTD
  • Quality stocks underperformed the broad market in March, but did better than Momentum and Min Vol
  • We are neutral on this segment of the market in the short-term, as R6M price momentum is currently neutral (around the mean, red line), so it is not overbought or oversold
  • Over the intermediate-term, we also neutral as current R3Y returns are not elevated relative to history
  • We believe higher quality stocks have room to run if market volatility increases from current low levels

For transparency, these are the top 10 holdings in the QUAL ETF:

For the full list, please navigate to this page.

Summary Thoughts

Below is a summary of our current recommendations:

Segment Short-Term View Intermediate-Term View
Value Bullish Bullish
Momentum Bearish Bearish
Low Volatility Bearish Neutral
Quality Bullish Bullish
Click to enlarge

Our views have not changed much since February.

We continue to recommend an overweight stocks that exhibit Value and Quality characteristics, for the best chance of outperforming the broad market in the short- and intermediate-term. Investors should avoid Momentum stocks.

For a similar analysis at the sector or asset-class level, we invite readers to take a look at the following recent publications:

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.