Today is the first day of Lent and the first day of the latest “Investment Sprint” that we run on the S&P 500 under our Smart Alpha Strategy. Why do we refer to this as a “Sprint”? Well, as a Fintech business, we take our lead from the terminology used in Agile Software Development (and, by extension, ourselves), where a Sprint is a repeatable (fixed) period of development set out by the product owner and the development team with specific tasks set to be achieved over consecutive periods of time: when one Sprint finishes the next Sprint immediately begins. Once agreed, the team is selected by the development team management (referred to as the scrum master) to perform the task concerned and then left to get on with it by the product owner.
Why the language of an Agile development framework? Well, as Wikipedia describes it, when compared to traditional software engineering approaches (e.g. “Waterfall” processes) that are themselves derived from physical development in construction and physical Engineering projects, “…Agile software development mainly targets complex systems and product development with dynamic, non-deterministic and non-linear characteristics”.
So, substitute the product owner with the investor, the scum master with the Smart Alpha process and the Team selected with the stocks in the strategy and the idea of Sprint frameworks corresponds well with the investment process we seek to operate in what we consider to be exactly this type of complex system environment.
Our Investment Sprints are two-month periods where the new “team members” (stocks) are selected on the third Tuesday of every other month and implemented the following day. To continue with the Agile analogy, there are four Factor development teams selected (Deep Value, Value, Growth and Core) with the make-up of each team being a function of what has occurred in the past Sprint(s) and the expectations of what should be achieved over the coming Sprint period (forecast Expected Returns).
Over the period of the last Sprint, the Strategy performed well: even after the sharp sell-off yesterday, a 5.9% gross return (2.8% ahead of the benchmark) was commendable.
From a factor perspective, performance from our Growth selections were effectively flat but Deep Value performed extremely strongly – up 12.6% on average. Although with hindsight this may be no surprise (amongst the Deep Value selection Tesla is up 44% and the Cruise Ship sector up 31% on average over the period) that was not the expectation of most investors in late December. As a consequence, the stock and sector construction of both the last Sprint and the new Sprint may provide an insight into where the Factor (and hence Portfolio) Returns might be derived from – both past and present.
In December the largest exposures were to Consumer Services, Energy, Consumer Non-Durables, Electronic Technology and Health Technology. Going forward, we see a greater exposure to Utilities, Health Technology, Technology Services and Producer Manufacturing.
This Sprint clearly has a more defensive, lower Beta and shorter duration look to it, following the Deep value “bounce” of the last Sprint period. An average 2m total Expected Return forecast of 5.5% across the Sprint selection is still pointing to the availability of credible outperformance (the average 2m return for the S&P 500 over the last 5 years is 1.4%) but this Lent Sprint is set to be a tougher period for both our Sprint team and for the market as a whole.