Recoveries, Reversals, and Business Risk

Stratified LargeCap Index up 89.8% since trough as rotation begins

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Markets have come a long way in the last year. Following the panic selling in February and March 2020, record fiscal and monetary stimulus shored up equity markets. The S&P 500 has hit new highs, up 77.8% since the low on  March 23rd, 2020. The Stratified LargeCap Index, which reweights to capture a broader range of business opportunities, significantly outperformed, up 89.8% (Exhibit 1).

As we wrote at the time in our piece, “Sell-offs, Reversals & Business Risk” (26th March 2020) the best performing sectors in the sell-off usually underperform in the recovery, and vice versa, the worst performing sectors should outperform. Indeed, the recent recovery has played out in-line with this theory. The bull-run in mega-cap technology stocks left cap-weighted indices significantly overexposed to tech and underexposed to the bombed-out Consumer sector, which created a drag as the rotation into under-owned, smaller, value segments took hold. Stratified Weight allocates equitably across business risks. As such, the Stratified LargeCap Index was able to fully capitalize on the reversal; no upside opportunities were underrepresented and Stratified Weight added value in every sector (Exhibit 2).

Exhibit 1. Coronavirus Pandemic: Sell Off and Subsequent Recovery

Exhibit 2. Stratification Added Value in Every Sector‍

We believe that the rotation into value is just getting started. Following the strong rally, equity multiples are looking stretched. When market valuations hit historical highs, investors usually seek stocks and sectors with cheaper multiples and Value comes back in style, as has been the case recently.

After the rally comes the value rotation

Last year’s panic sell-off has now fully reversed and equity markets are at historically high valuations. The S&P 500 traded at 27x forward earnings at the start of 2021. The last time P/E multiples were at that level was March 2000, the height of the DotCom bubble! When the bubble burst, investors rotated into lower valuation (cheaper) segments and value stocks beat the market for several years.

Exhibit 3. Value Outperformed Following Periods of High Market Multiples

Furthermore, after a decade of underperformance, value stocks are languishing at a comparable discount to that seen in 2000. We see scope for the rotation into value to persist to the benefit of alternative weight products such as Stratified Weight. By allocating across a broad range of industries and rebalancing frequently the Stratified LargeCap Index offers an attractive blend of diversification and value in every sector (Exhibit 4).

‍Exhibit 4. The Stratified LargeCap Index is Trading at a Discount to the S&P 500 in Every Sector‍

Disclaimers
Past performance is no guarantee of future results. Index performance does not represent actual fund or portfolio performance and such performance does not reflect the actual investment experience of any investor. An investor cannot invest directly in an index. In addition, the results actual investors might have achieved would have differed from those shown because of differences in the timing, amounts of their investments, and fees and expenses associated with an investment in a portfolio invested in accordance with an index. None of the Syntax Indices or the benchmark indices portrayed herein charge management fees or incur brokerage expenses, and no such fees or expenses were deducted from the performance shown; provided, however that the returns of any investment portfolio invested in accordance with such indices would be net of such fees and expenses. Additionally, none of such indices lend securities, and no revenues from securities lending were added to the performance shown. Charts and graphs are provided for illustrative purposes only.

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