361 U.S. Small Cap Equity Fund
The 361 U.S. Small Cap Equity Fund (ASFZX) returned 1.64% for the month of July, while the Russell 2000 Index gained 0.74%. Our behavioral models performed well during the month with quarterly and annual revision sub-models producing positive spreads on both earnings and revenue estimates. The top quintiles of our two main alpha models each beat the Russell 2000 Index—creating a nice tailwind for the Fund. Returns to most valuation models were largely flat to negative. The lone exception was our cash flow-to-price measure where the most attractively valued stocks outperformed the lowest-ranked by 170 basis points. Given that, we seek to have a larger exposure to this factor compared to the benchmark, it contributed to our relative performance.
Analyst sentiment, as measured by net earnings revisions, was slightly more favorable than the month of June, however, the net revision ratio was still below 50%. Even within this net negative environment, our portfolio holdings generated 275 net positive revisions. A similar-sized portfolio created from a random sampling of the universe would have been expected to generate 11 net negative revisions. Our strategy’s ability to seek out companies expected to receive positive estimate revisions produced a portfolio with 286 excess revisions. The spread between the returns to the top and bottom quintiles of this factor narrowed from June, but was still a positive contributor to performance. Overall stock selection was a benefit, particularly within the Information Technology sector. Our Energy picks, collectively, had the greatest detraction from performance.
In July, 46 portfolio companies reported quarterly results. Twenty-nine, or about 59%, announced earnings that significantly exceeded expectations, while only 15% missed by a statistically significant amount. Returns to positive surprises were rewarded less than usual, while earnings misses were punished more. Portfolio returns were aided by avoiding large negative surprises and owning those that reported large positive surprises.