361 U.S. Small Cap Equity Fund
After a volatile first quarter to start 2018, small cap stocks seemingly “normalized” in April. The Russell 2000 Index ended up 0.86%, while the small cap category, in aggregate, failed to outperform generating a 0.46% return. The 361 U.S. Small Cap Equity Fund was not immune, returning 0.27% for the month.
April was a continuation of what has been a difficult environment for the 361 U.S. Small Cap Equity Fund. While we were successfully able to populate the portfolio with significantly more positive analyst estimate revisions than a random, similarly sized portfolio, marking the 41st straight quarter of doing so (278 for the Fund vs. 84 for a random portfolio for the month), the overall payoff to that ability was negligible. The stocks that received the most upward revisions (Quintile 1) underperformed on a relative basis versus those ranked lowest in our process (Quintile 5).
Secondarily, earnings surprises were irregularly rewarded during the month. Companies that announced the largest surprises underperformed those that announced the smallest, or even “misses”, by 3%. This is unusual, but does, indeed, inform us as to the general market environment.
For April, it was largely expected that certain stocks would announce positive earnings, and such earnings events were already priced into the stock. Therefore, if they did not surprise to a large degree—they traded flat or perhaps even negatively.
As we’ve noted in the past, while we do not seek to exploit momentum as a factor, the very nature of what we do creates a small and incidental exposure to momentum throughout time. By our measures, momentum remained largely negative and adversely affected performance in April.
Regarding stock selection, positive standouts for the month were Consumer Discretionary, Consumer Staples and Energy while the Industrials and Financials sectors lagged.