Fall of Big Tech a booster shot for Wall Street’s stock quants
Sign up now: Get ST's newsletters delivered to your inbox
The value strategy of buying cheap shares has also seen another bump, with rising rates driving investors away from stocks with high multiples.
PHOTO: AFP
Follow topic:
NEW YORK - Another tech plunge, another shot in the arm for stock quants mounting a big comeback in Wall Street’s awful year.
As the Federal Reserve ramped up its hawkish policy guidance last week
With rising interest rates spurring an abrupt end to the leadership of Big Tech, the largest technology companies are wielding less and less power over broader indexes, as former high-fliers like Meta Platforms and Amazon.com crash anew in the latest wave of selling. Reversing the extremes of the cheap money years, the capitalisation-weighted S&P 500 hit the lowest versus an equal-weighted version of the benchmark since 2019.
All this is a boon for so-called factor investors, who dissect equities according to their maths-derived traits, from how cheap equities look to how fast they have risen. These funds are typically underweight tech mega-caps and have a propensity to spread out their exposures, a favourable set-up in this era of improved market breadth.
In 11 of the last 13 sessions where the S&P 500 has dropped more than 2 per cent, strategies beloved by factor funds such as value, quality, momentum and low volatility have all made money, according to Dow Jones’ market-neutral indexes.
“You got a much more diverse opportunity set that allows for more factors to come into play,” said Mr Sean Phayre, head of quantitative investments at Abrdn Investment Management. “Previously 2019, 2020 was a very one-dimensional market.”
Systematic managers who deploy factor strategies in one form or another are on a winning streak. The AQR Equity Market Neutral Fund has rallied anew since October to notch a 21 per cent gain so far in 2022. The Jupiter Merian Global Equity Absolute Return Fund, which bled assets throughout the tech bull run, is up nearly 7 per cent.
The maths whizzes of Wall Street crunch data to find patterns across the entire stock market. That means they are mostly spreading out their wagers across a vast number of securities. So when market gains are concentrated in a few mega-caps, quants almost by definition will own far less of those shares than a cheap-and-cheerful S&P 500 tracker.
That was the case in the low-rate years when the Faang block – Facebook, now known as Meta, Apple, Amazon, Netflix and Google parent Alphabet – drove the bull market.
Now, a broader group of winners is giving money managers more opportunities. In a reversal of pre-2021 trends, the S&P 500 pulled off an around 8 per cent surge in October, even with half of the Faangs falling.
Lately, the momentum factor, a popular quant trade, has also joined the party. A chameleon investing style that simply bets on the past year’s winners, it does not do well at turning points like the start of 2022. But having rebalanced into outperformers like healthcare and energy stocks, the strategy has rallied this quarter, in a sign of persistent trends driven by sticky inflation.
The US$12 billion iShares MSCI USA Momentum Factor ETF (ticker MTUM) drew a record US$2 billion in inflows in October, after its 13 per cent surge beat the wider market by the most in its nine-year history. A market-neutral version compiled by Bloomberg is on track for the best year since 2015.
Wells Fargo’s head of equity strategy Christopher Harvey wrote in a note: “Momentum is the all-weather strategy.” He expects more market damage caused by inflation and jobs data, touting momentum strategies as “they have a tendency to perform well” in stressed conditions.
Meanwhile, 87 per cent of high-momentum firms have beaten earnings expectations this season, compared with 70 per cent of the S&P 500, as per Mr Harvey. These winning names are also getting rewarded more for good results and punished less for bad ones.
The value strategy of buying cheap shares has also seen another bump, with rising rates driving investors away from stocks with high multiples. Meanwhile, the low-volatility trade is shining as steadier stocks like healthcare names win out.
These trends have only intensified lately, with American heavyweights such as Amazon, Alphabet and Microsoft posting disappointing earnings – a big turnaround compared with the unbridled tech optimism of the low-rate era.
Mr Phayre said: “The single dimension that was driving those names to excess returns – that model is somewhat broken. Come 2021, 2022, there’s a realisation there’s going to be some form of payback for all the cheap money.” BLOOMBERG
