One of the things the team at 361 Capital has noticed during the pandemic is that we’ve had a lot more time to listen to podcasts while working from home. One of the programs we follow is The Meb Faber Show, so it was exciting to listen to a recent episode featuring Harin de Silva, CFA, Ph.D., Portfolio Manager for the Analytic Investors team at Wells Fargo Asset Management and sub-advisor to our long/short equity strategies.

The rapid spread and wide-felt human and economic impact of the novel coronavirus (COVID-19) have continued to roil global equity markets. The chart below plots factor performance since the market began pulling back on February 19. Low volatility continues to be the best-performing factor by a wide margin, with the majority of the other factors underperforming.

As the world becomes increasingly concerned with the economic fallout related to the COVID-19 virus, global equity markets have sharply retreated. The chart below plots worldwide Google search activity for “coronavirus” relative to the performance of the MSCI World Index. Not surprisingly, the index performance is negatively correlated with the rise in searches for coronavirus, with the recent spike in searches inversely mirroring the steep drop in the MSCI World Index

We often talk about factor returns as a single percentage, similar to a broad index return. The measures are helpful to get a quick understanding, but do not reveal much about the underlying dynamics. A factor’s return (also called a spread) is derived by the difference in returns of the top-ranked stocks and the bottom-ranked. This is done by quantizing the stocks into equal groups of similar rankings, based on a certain metric. Deciles, quintiles, or quartiles are popular to use. A decile spread is the average return of stocks in the top decile (D1) subtracted by the average return of stocks in the bottom decile (D10).

What recently occurred in U.S. financial markets is nothing short of extraordinary when viewed through the lens of factor investing. While on the surface it appeared as if all were calm for the five trading days from September 4-September 10 with the S&P 500 Index rising by 2.56% and the Russell 2000 Index (small cap stocks) rising by almost 5%. Underlying this performance, however, were significant factor moves, at largely unseen levels of volatility, since the Great Financial Crisis in 2008-2009.