361 U.S. Small Cap Equity Fund
U.S. small cap stocks were positive for the month of February, but trailed, on average, larger capitalized companies. The 361 U.S. Small Cap Equity Fund returned 0.5% compared to 1.9% for the Russell 2000® Index. A variety of factors contributed to this performance. Growth outperformed Value by 1.0%, which was a headwind on a relative basis. Returns to medium-term momentum were mixed across quintiles, with low momentum stocks outperforming (+3.0%) higher momentum stocks (+0.8%). This detracted on a net basis from returns given the strategy tends to have some exposure to momentum as a byproduct of the models (versus an explicit momentum exposure). Our valuation model experienced similar dynamics, where the cheapest stocks were the weakest, returning 0.7%, relative to the most richly-priced securities, which returned 1.9%. These factor returns created what was a challenging environment for the strategy. We create the portfolio such that it has the highest exposure to the “tail” of our Alpha model. The spread between quintile 1 and quintile 5 of that model (i.e., the highest-ranked stocks versus the lowest-ranked stocks) was negative by 120 basis points, meaning that the pool of stocks we choose from based on that model, as a group, underperformed lower ranked stocks. Despite that difficult backdrop, we were still able to build a portfolio that experienced more net positive analyst revisions and earnings surprises than would have been expected in a randomly constructed portfolio. Stocks in the 361 U.S. Small Cap Equity Fund experienced 66 net positive analyst earnings revisions, whereas a random portfolio would have been expected to receive 92 net negative revisions. Net positive earnings surprises among our holdings (+23) were also more than would have been predicted in a random portfolio (+14). Portfolio holdings that had the best performance during the month were Chemours, Acorda Therapeutics and Masimo. Stocks that detracted the most from performance were ChannelAdvisor, Lydall and INC Research Holdings. Given the long history we have analyzing and investing in the behavioral components of the financial markets (i.e., over 30 years), we remain focused on investing in stocks we believe will be the beneficiary of positive earnings revisions, while avoiding the opposite.