Interim Weather Report June 2025
We call our regular Apollo based commentary “The Weather report”. The analogies that we can make with the multiple elements of Value, Momentum and Uncertainty impacting markets in a continuous way chimes nicely with the idea of Currents, Tides and Winds, all impacting the navigation of the high seas. Whatever the nature of the vessel concerned or the skills, experience and capabilities of the crew, the Maritime Weather Report is an essential part of the information system that is required and so the Market Weather Report is designed to perform a similar, essential function.
This update covers the fact that, as part of our Smart Alpha strategy process, we rebalance and update our strategy portfolios every two months (mirroring the language of an Agile dev. framework, we refer to the performance period between rebalances as a “Sprint”) . The latest rebalance just happened and the performance of both the risk and return decisions of the portfolios over not only the last “Sprint” but the two prior Sprints provide useful insights into how both the Smart Alpha portfolios and the markets as a whole are now set.
Weather Forecast
Last week’s report noted the big figure obsession of the financial media (a break back above 6000 on the S&P500). The break-out didn’t last long -the index is at 5980 at time of writing and simply reinforces the thoughts that we expressed about a lack of positive market “beta” for the US market. Obviously both domestic US and wider geopolitical events are providing a net drain on risk appetite but, for now at least, the beta trend remains flat for the S&P500 large cap index and so a retracement back to value seems a measured response. By contrast market beta remains in an uptrend for the tech heavy Nasdaq 100, the KOSPI in Korea, the ST50 in Taiwan and for the Nikkei 225 in Japan. For those hoping to build out beyond US exposure, note that market beta has started to recover for the STOXX 600 benchmark in Europe over the last month or so but, like the large cap US remains essentially flat.
In terms of the recent Sprint performances of the various Strategies that we run; we can make a number of observations. When we construct a Smart Alpha portfolio, we not only rank stocks on the basis of our risk-adjusted expected returns, but by investment factor category. This is a crucial part of the risk management process embedded within our portfolio construction. At each rebalance we construct a 48-stock equal weighted portfolio with equal investment factor exposures to the factor(s) concerned. For example, we can construct a simple “Quality portfolio” by selection from stocks that Apollo categorises as Quality or a “Value portfolio” with equal exposures to Value and Deep Value stocks. We can also construct a “Factor Neutral” portfolio with equal exposures to Deep Value, Value, Quality and Growth. This ensures that there is no unintended or persistent factor bias embedded in the portfolios.
Good Timing?
Looking at the 6-month performances of the equal-weighted US S&P500 based portfolio (listed as Large-Cap US Multi Factor on our Website https://www.libra-apollo.com/strategies) we can see that the portfolio is up 16 % over the period with each of the factor groups contributing an approximately equal return (between (+15.9% ) and (+17.7%) to be precise). However, over 3 months, the (+11%) return of the overall portfolio was spread across a (+3%) return to Value, (+ 8%) to Deep Value, (+14%) to Growth and a (+15%) return to Quality. Whilst we could have easily chosen a Large Cap “Growth only” portfolio over the last three months with a similar (+9.8%) return, the 6-month return of (+9.6%) would have severely lagged the multi-factor version.
A similar evaluation can be made with size. In this case, the 6-month performance of a US “Value portfolio” selected from the S&P500 would have given a 12% return but one selected from the S&P900 ( S&P500 + Mid Cap 400) would have given a return of (+19%). The relative equal weighted Mid and Large cap portfolio would have outperformed the equal weighted S&P500 version slightly (+17.6% vs +16.8%) but the point here is that factor timing may also be universe dependent, so unless you are actively pursuing a factor bias strategy, the multi-factor equal-weighted structure is probably the most credible, risk-managed approach.
The same pattern is evident with the Global S&P1200 based strategy. The sub-factor portfolios are broadly equal over 6-months, with the overall portfolio (+18.8%). The Sub-factor baskets range from (+16.8%) for Value to (+20.5%) for Quality but over 3-months the spread is between (+4.5%) to (+12.8%) for the same pair of factors. As far as the recent Sprint is concerned, the Large Cap Global Multi-Factor performance (+15.7%) was split across Value (+4.6%), Deep Value (+19.5%), Quality (+19.1%) and Growth (+19.2%).
The point of this is not just to throw numbers out there to reflect the relative outperformances of our Smart Alpha Strategies but to explain in our nautical parlance that outperformance comes from not only recognising the direction of the “current” but to recognise that there are multiple currents operating at the same time. To “make a bet” on relative factor performance is a risk decision – not an expected return decision in that you are making a positive bet on, say, “Value” at the same time as making a non-positive / negative bet on perhaps “Growth”. In this sense it doesn’t make a lot of difference as to how Apollo might define Value or Growth compared to other categorisers – only that not all our “currents” will be running at either predictable or stable speeds over the investment horizon. (At this point I like to note that at the start of 2023, Amazon was simultaneously the third largest Value stock and, at the same time the third largest Growth stock in a particular organisation’s Factor Benchmark portfolios.)
Summer outlook
For these reasons we believe that a regular rebalance is an essential part of the risk management process and should not only reflect the reality of past performance but the reality of potential return. At the last rebalance in April, the fallout in the early part of the month meant that our S&P1200 Factor based expected returns were relatively high – with the portfolio as a whole forecast to generate (+19.7%) across Deep Value (+22.7%), Value (+17%) Quality (+18%) and Growth (+21%). The outcomes – (+19.5%), (+4.5%), (+19.1%) and (+19.2%) respectively were clearly not in line for Value but very credible for the rest. Fast forward to the new Sprint and the forecasts have dropped significantly – with our forecast selections providing for a (+8.2%) return – still strong compared to most models I grant you (the S&P500 equivalent forecast is (+6.6%) but remember too that these are probability based forecasts with a range of possible outcomes. For example, the Apollo forecast for the S&P 500 Market Cap weighted index in two month’s time is 5903 – with a range between 5434 and 6400. – that is a 2-month return that is essentially flat (no Beta) but with a possible downside of (-8%) and possible upside of (+7%).
For our S&P500 based Multi-Factor portfolio we have a 2-month period forecast return of (+6.6%) with a possible upside of (+13.4%) and a downside of (+0.4%). If one or more factors disappoint then these returns will move to the bottom of their expected return ranges, but at least we begin our selection process with optimism.
We noted in the last posting that we had been able to Sail (not sell) in May and that this rebalance would give us some thoughts on what to do into the summer. On the basis of what we have been able to do so far this year and what our stock selections are throwing up, we can continue to sail relatively serenely onwards. Unlike those who have poor or negative performance so far this year, we do not have to “ put out all of our sails” (increasing risk via either factor bets or stock specific bets) in an attempt to recover performance and returns but can stay with our processes and run on a “Broad reach” with the currents, tides and more moderating winds into the clear blue yonder.
You can find details of all of our Strategies on our Website https://www.libra-apollo.com/strategies