Core Equity Analysis

Style and Size Investment Stratigies

Note

Data on this page was last updated on May 18, 2023

Expectations

Expectations are all about trying to identify future expectations of a particular asset.

Warning

A practitioner needs to confirm the expectations with a trend following model and risk management rules. It should not be viewed in a vacuum, and external forces should always be considered.

Size and style are two different factors that investors can consider when constructing a portfolio and implementing an investment strategy.

Size

Size refers to the market capitalization of a company, or the total value of its outstanding shares of stock. Investors often categorize companies based on their size, such as small-cap, mid-cap, and large-cap. Small-cap companies are generally considered to be riskier, but with potentially higher returns, while large-cap companies are considered to be less risky but with potentially lower returns.

Style

Style, on the other hand, refers to the investing approach used by an investor, such as value, growth, or income investing. Value investing typically involves buying stocks that are undervalued by the market and have good fundamentals, while growth investing typically involves buying stocks of companies that have the potential for high future growth. Income investing, as the name suggests, involves buying stocks or other investments that provide a steady stream of income through dividends or interest payments.

When it comes to portfolio construction and investment strategy, investors can consider both size and style factors. For example, an investor might choose to invest in small-cap value stocks if they are looking for potentially high returns with a value-based approach. Alternatively, an investor might choose to invest in large-cap growth stocks if they are looking for stability and growth potential in a more growth-oriented approach. It’s important for investors to consider their own goals, risk tolerance, and time horizon when deciding on their investment strategy and how to incorporate size and style factors into their portfolio.

Long-term (CAPM) Expectations

Running the traditional CAPM model sets the framework for analyzing a multi-factor regression model. It also helps to understand the academic world’s perspective on the asset class. I would not put too much weight on these statistics unless you are a pension fund with very long-term investment horizons. Most of us are not and need to adjust our expectations for both the business cycle and economic factors.

Data Source: IEX Exchange
Annualized Performance Metrics (Rf = 2.00%)
Return Std Dev Sharpe Beta
Style - Large Value 11.22% 0.1702 0.5303 0.878
Style - Large Growth 10.15% 0.2010 0.3967 0.988
Style - Large Blend 9.25% 0.1921 0.3693 0.970
Bechmark (Wilshire 5k) 8.29% 0.1807 0.3403 1.000
Style - Mid Core 9.04% 0.2190 0.3144 1.047
Style - Small Core 9.32% 0.2339 0.3061 1.071
Style - Mid Growth 8.92% 0.2322 0.2914 1.080
Style - Small Growth 8.69% 0.2352 0.2782 1.127
Style - Mid Value 8.1% 0.2229 0.2675 1.033
Style - Small Value 8.36% 0.2347 0.2650 1.114

Business Cycle Expectations

The first step to estimating proper expectations is to understand the performance metrics filtered by our six business cycle stages. Core equities are sensitive to inflation expectations, growth, and credit risk; which often correlate to the business cycle.

Click to Show the performance tables by stage of the business cycle.
Annualized Performance in a Recession (Rf = 2.00%)
Return Std Dev Sharpe
Style - Small Core -13.87% 0.3285 -0.4741
Style - Mid Core -13.94% 0.3237 -0.4833
Style - Large Growth -19.2% 0.3566 -0.5833
Bechmark (Wilshire 5k) -17.72% 0.3033 -0.6379
Style - Small Growth -26.11% 0.4025 -0.6850
Style - Mid Growth -26.43% 0.4048 -0.6888
Style - Large Blend -24.72% 0.3670 -0.7142
Style - Large Value -46.31% 0.5757 -0.8229
Style - Small Value -35.64% 0.4334 -0.8518
Style - Mid Value -35.05% 0.4064 -0.8940
Annualized Performance in a Recovery (Rf = 2.00%)
Return Std Dev Sharpe
Style - Large Value 37.87% 0.1557 2.2579
Style - Mid Growth 42.45% 0.2231 1.7769
Style - Mid Core 40.54% 0.2201 1.7153
Style - Large Growth 33.58% 0.1922 1.6101
Style - Small Growth 41.76% 0.2433 1.6018
Style - Mid Value 41.38% 0.2458 1.5703
Style - Small Core 42.19% 0.2517 1.5646
Style - Large Blend 31.17% 0.1900 1.5043
Style - Small Value 43.19% 0.2703 1.4936
Bechmark (Wilshire 5k) 30.41% 0.1891 1.4718
Annualized Performance in a Early Expansion (Rf = 2.00%)
Return Std Dev Sharpe
Style - Large Blend 13.89% 0.1584 0.7346
Style - Small Core 17.82% 0.2127 0.7282
Style - Small Value 16.51% 0.2034 0.6984
Style - Large Growth 13.55% 0.1646 0.6870
Style - Mid Value 14% 0.1882 0.6242
Style - Large Value 12.15% 0.1658 0.5994
Style - Mid Core 13.78% 0.1929 0.5978
Bechmark (Wilshire 5k) 11.78% 0.1635 0.5854
Style - Mid Growth 12.27% 0.2068 0.4860
Style - Small Growth 12.2% 0.2161 0.4622
Annualized Performance in a Mid Expansion (Rf = 2.00%)
Return Std Dev Sharpe
Style - Mid Value 10.47% 0.1325 0.6251
Style - Large Value 9.66% 0.1246 0.6013
Style - Large Blend 9.52% 0.1296 0.5679
Style - Large Growth 9.04% 0.1370 0.5027
Style - Mid Core 8.27% 0.1401 0.4376
Bechmark (Wilshire 5k) 7.05% 0.1286 0.3840
Style - Small Value 7.67% 0.1447 0.3832
Style - Small Core 8.01% 0.1583 0.3712
Style - Mid Growth 6.32% 0.1454 0.2903
Style - Small Growth 3.95% 0.1574 0.1202
Annualized Performance in a Late Expansion (Rf = 2.00%)
Return Std Dev Sharpe
Style - Small Core 10.04% 0.1714 0.4589
Style - Mid Core 9.02% 0.1599 0.4295
Style - Small Growth 9.9% 0.1945 0.3973
Style - Mid Growth 10.35% 0.2102 0.3886
Style - Large Blend 7.44% 0.1404 0.3787
Style - Large Value 7.16% 0.1388 0.3634
Style - Small Value 6.68% 0.1513 0.3024
Style - Large Growth 5.3% 0.1719 0.1872
Bechmark (Wilshire 5k) 4.7% 0.1708 0.1541
Style - Mid Value 2.91% 0.1449 0.0603
Annualized Performance in a Imminent Recession (Rf = 2.00%)
Return Std Dev Sharpe
Style - Large Blend 9.48% 0.1694 0.4322
Style - Large Growth 10.35% 0.2094 0.3903
Style - Mid Value 6.87% 0.1626 0.2924
Style - Large Value 6.67% 0.1656 0.2756
Style - Mid Core 6.65% 0.1932 0.2353
Style - Small Growth 6.44% 0.2222 0.1950
Style - Mid Growth 5.89% 0.2109 0.1800
Style - Small Value 4.68% 0.1886 0.1382
Style - Small Core 2.44% 0.2039 0.0206
Bechmark (Wilshire 5k) 1.51% 0.1779 -0.0281
Note

The current stage of the business cycle is stage 6 which is a imminent recession.

**

Business Cycle Stage Best performers

Return Std Dev Sharpe
Style - Large Growth 10.35% 0.2094 0.3903
Style - Large Blend 9.48% 0.1694 0.4322
Style - Mid Value 6.87% 0.1626 0.2924
Style - Large Value 6.67% 0.1656 0.2756
Style - Mid Core 6.65% 0.1932 0.2353

Annualized Metrics (Rf = 2.00%)

Important

Avoid the following equity classes:

Return Std Dev Sharpe
Style - Small Growth 6.44% 0.2222 0.1950
Style - Mid Growth 5.89% 0.2109 0.1800
Style - Small Value 4.68% 0.1886 0.1382
Style - Small Core 2.44% 0.2039 0.0206
Bechmark (Wilshire 5k) 1.51% 0.1779 -0.0281
Annualized Metrics (Rf = 2.00%)

Factor Expectations

By this point, you should know that economic factors play a vital role in estimating the future expectations of an asset. Each asset needs to be run through our machine learning regression model to assess what factors are essential and the future expectation for the help.

Relative Stregnth Analysis

Relative strength is a strategy used in momentum investing and identifying value stocks. It focuses on investing in stocks or other investments that have performed well close to the market or relevant benchmark. We use relative strength to confirm our assumptions about our expectations. We should see out performance compared to the benchmark and peers if our assumptions are correct.

Rotation Analysis

A rotation chart can help identify the momentum of a trend. The top-left quadrant is a developing trend, just starting to unfold. The top-right quadrant is a developed trend. A weakening trend is in the bottom-right. And the last quadrant, the bottom-left, is a downtrend.

Relative Rotation, to the market

Zero iis the performance of Wilshire 5k, Above zero is performance in excess of the market, anything below is underperformance.

Rotation Chart

Rotation chart of Rate of Change, y and x axis is rotion of rate of change.

Trend Anlaysis

Trend following is a trading style that attempts to capture gains by analyzing an asset’s momentum in a particular direction. When the price moves in one overall direction, such as up or down, that is called a trend.

Trend traders enter into a long position when security is trending upward. An uptrend is characterized by higher swing lows and higher swing highs. Likewise, trend traders may opt to enter a short position when an asset is trending lower. Or, in our case, managing long-only, chose to avoid securities that are trending down. A downtrend is characterized by lower swing lows and lower swing highs.

Having predefined rules on what is and isn’t a trend also provides us with a method for controlling risk. We know at what price we would not consider being invested in a position. Following our trend system, we always know when we should cut our losses.

Trend Table & Rolling Performance

Rolling Performance
Trend Efficiency Ratio One Month Three Month Six Month One Year Drawdown
Style - Large Growth 0.22 3.25 8.1 21.89 12.31 -3.8
Style - Large Blend 0.01 0.35 1.83 10.41 5.85 -4.23
Style - Large Value -0.12 -0.81 -1.56 7.05 5.82 -4.92
Style - Mid Growth -0.08 -2.17 -3.42 7.82 5.96 -9.14
Style - Small Growth -0.03 -0.84 -3.14 7.27 5.77 -9.52
Style - Mid Core -0.16 -1.87 -6.8 2.24 2.62 -10.16
Style - Mid Value -0.27 -2.79 -8.7 -1.89 -5.2 -11.18
Style - Small Value -0.17 -2.25 -9.88 -2.52 -3.13 -13.2
Style - Small Core -0.12 -2.15 -9.49 -2.23 -3.27 -13.34
Drawdown is calculated from the 52 week high, less current price. The draw down will not reflect a loss that is longer than one year. Trend is based off our own propritary trend follwing model.

Summary

To build a tactical portfolio, we need to understand and set expectations. We start with our macro and factor models. We then need to confirm our assumptions with a relative strength analysis. Finally, we want the ability to control the downside risk when things do not go as expected. We use a trend analysis that sets the point that we will exit no matter what.

E(r) Business Clycle E(r) Factor Relative Rotation Absolute Rotation Trend Efficiency Drawdown
Style - Large Growth -3.8
Style - Large Blend -4.23
Style - Large Value -4.92
Style - Mid Growth -9.14
Style - Small Growth -9.52
Style - Mid Core -10.16
Style - Mid Value -11.18
Style - Small Value -13.2
Style - Small Core -13.34