361 U.S. Small Cap Equity Fund
There was no shortage of interesting talking points within capital markets for February, whether it be the obvious heightened level of volatility seen early in the month, or the seemingly gigantic moves, both positive and negative, that followed. Despite being in “correction territory,” markets rebounded, though remained negative for the month. Reflecting that on a points basis, February witnessed some of the largest declines in the U.S. equity markets in history, but in percentage terms, we have been here before. There was nowhere to hide, and certainly U.S. small cap equities was not an exception. For the month, the Russell 2000 Index finished down 3.87%. The 361 U.S. Small Cap Equity Fund was not immune to such volatility and trailed by a reasonable margin, declining 5.95% for the month.
From an attribution perspective, no single model or factor caused the underperformance for the Fund, rather a combination of components adversely impacted results. While we focus our attention on the behavioral anomaly of analyst revisions, that was not rewarded. Coupled with relatively underwhelming valuation returns and idiosyncratic stock events, it was a difficult month.
Our portfolio experienced 432 excess positive revisions from the sell-side community, which compares favorably to a randomly generated portfolio of similar size at 79. This means, while the return to the anomaly was negligible, our models were still able to populate the portfolio with excess positive earnings estimates. From an earnings perspective, of the 684 companies that reported earnings, 52.6% were significantly positive. By contrast, only 19.4% reported earnings significantly below consensus. While not the primary component to the strategy, we strive to hold stocks that announce earnings greater than consensus. For the 361 U.S. Small Cap Equity portfolio, our models were able to capitalize on this by holding a portfolio of stocks that announced more earnings beats than misses by a sizable margin. Of the portfolio holdings for the month, 58 reported earnings, 35 of which announced earnings greater than consensus (60.3%, comparing favorably to the broader market at 52.6%).
The focus of the strategy is on the various quantitative models, though as mentioned, idiosyncratic stock events were the primary culprit of relative underperformance. Health Care and Industrial names were the largest detractors from performance while two sectors, Utilities and Real Estate, experienced positive stock selection and beat the benchmark.