The Quant Cycle

19 Apr 2022

Dear investors,

The first quarter of 2022 was difficult for equities as the Russian invasion of Ukraine unfolded and the increased likelihood of additional interest rate hikes dawned on investors. The MSCI All Countries index ended the quarter about 3.3% lower. The uncertainty about the supply of oil and gas caused basic materials to skyrocket, with the sector outperforming the index by more than 20% thus far. Technology stocks on the other hand struggled with central bankers’ more hawkish stance and as a sector had some of the worst performance year-to-date. As this shift unfolds, some of the best growth and momentum stocks are caught in a reversal movement which mainly benefits the value factor.

With some imagination you can see the ‘Quant Cycle’ unfolding. We like to refer you to the website and the very interesting paper written by the research department of Robeco. The quant cycle itself can be illustrated as follows:

In summary the findings are as follows:

• During normal stages (2/3 of the time) all factors show decent, positive alphas.
• The value factor experiences a major drawdown about every decade. Drawdowns in value historically tended to occur in bullish environments due to a growth rally - as we have seen lately - or in bearish environments due to a value crash, like during the financial crisis of 2008.
• Immediately following a crash of value there is a reversal in the pattern: growth loses big time and value makes a comeback. After the reversal stage is over, the factors return to their normal, long-term state.

If this analysis can be a guide for the future, this means good times for value-minded quant investors are on the horizon. And, despite difficult markets, we have seen a small taste of this within our own funds during 2022. Vector Navigator for instance is down just 1.7% during Q1, outperforming its peers by 2.9% year-to-date. Vector Flexible, which currently hedges about 45% of the market risk, has only lost 0.04% so far. The fund outperformed the Morningstar category by approximately 4.2% during the first quarter. This outperformance can in part be explained by a successful stock selection and in part by our hedging mechanism, which works extremely well in times of increasing interest rates as the duration risk encased in the strategy is minimal compared to most of our bond-heavy peers.

Best regards,

Werner, Thierry & Nils