361 U.S. Small Cap Equity Fund
It was a mixed August for U.S. equities, as illustrated by varying return figures for the U.S. market indices. While the NASDAQ 100 Index returned 2.03% and the S&P 500 Index gained 0.31%, the Russell 2000 Index was a relative laggard at -1.27%. The 361 U.S. Small Cap Equity Fund, by contrast, outperformed, returning 0.19%. Year-to-date through August, the Fund has returned 5.80% compared to the Russell 2000 Index at 4.42%.
Analyst sentiment within the small cap universe improved for the second consecutive month. Net earnings revisions, however, remained slightly negative overall. When looking at the portfolio for the inefficiency we seek to exploit, (i.e., positive analyst earnings estimate revisions) we consider two components: were we able to populate the portfolio with companies that received more positive earnings revisions than negative ones, and was there a positive payoff to the factor?
To the former, our portfolio experienced 284 more net positive earnings revisions for the month than a randomly constructed portfolio with the same number of positions as the 361 U.S. Small Cap Equity Fund (i.e., 98 stocks).
To the latter when looking at the universe in quintiles, the stocks predicted to be the recipient of an upward earnings revision represented by quintile 1, outperformed stocks predicted to experience the fewest earnings estimate increases (quintile 5 by 2.6%). Secondarily, our valuation tilt was a slight relative detractor, while our exposure to earnings surprises was a slight relative contributor
The portfolio also benefited further from robust stock selection led by Healthcare. This sector within the portfolio had a total return of 8.09%, comparing nicely to the broader universe at 4.81%. Energy was the worst performing sector within the benchmark, down over 10% for the month, after Hurricane Harvey made landfall in energy-rich Texas. In contrast, the Fund’s position in the sector was able to provide a positive absolute return in August.