Mid-Quarter Update: Quantitative U.S. Large Cap Growth Equity
Large Cap Value Stocks Return to Favor
The Glenmede Quantitative U.S. Large Cap Growth Equity Composite had a total return for the three months ending November 30, 2020 of +3.6% (+3.4% net of fees). On a relative basis, the Quantitative U.S. Large Cap Growth Equity Composite outperformed the Russell 1000 Growth Index by +2.1% (+1.9% net).
For the three month period, the S&P 500 and Russell 1000 Growth Indexes had total returns of about +3.9% and +1.5%, respectively. Investor sentiment was favorable in response to the U.S. elections, stronger than expected Third quarter earnings/revenues and vaccine advancements against Covid-19. Market volatility, as measured by the VIX, declined to about 20.6 from 26.4. The Russell 1000 Growth Index (+1.5%) underperformed the Russell 1000 Value Index (+9.2%) for each of the three months. The Russell Growth Index had outperformed the Value index for the 11 consecutive months ending August 2020 which was the longest streak since inception of the Russell style indexes in 1979. In the last twelves months the Russell 1000 Growth Index has outperformed the Russell 1000 Value Index by 34.7%, which can be seen in Exhibit 1. For the last three months, the best performing sectors in the Russell 1000 Index Growth were materials (+10.2%) and Industrials (+7.0%). Worst performing sectors were Utilities (-3.9%) and Real Estate (-2.7%).
In the three month period, the strategy was positively impacted from positions with lower relative market capitalizations versus the Russell 1000 Growth Index as the average stock outperformed the capitalization-weighted index. The strategy was favorably impacted from relative underexposures to Apple (AAPL, -7.6%), Amazon (AMZN, -8.2%) and Microsoft (MSFT, -4.8%). The strategy had mixed contributions from multi-factor stock selection models, including biases towards lower valuations (favorable) and attractive fundamentals (unfavorable). Stocks in the Russell 1000 Growth Index with lower valuations (Price/Earnings<15, total return of +6.9%) outperformed higher valuations (P/E>25, total return of +0.1%) by about +6.8%. However, the strategy had underexposures to stocks in the index with negative earnings which outperformed (+18.0% total return). Targeted industry group biases had relatively minor impacts as relative overweightings in Financials/Materials were offset by underweightings in Health Care/Industrial stocks.
The latest U.S. real GDP estimate for Third Quarter was +33.1% versus -31.4% for Second Quarter 2020. The higher-than-expected rebound followed the largest GDP contraction since 1947. GDP reflected large gains in personal consumption expenditures (+40.6%) and fixed investments (+30.4%). Lower federal spending (-6.2%) was a negative contributor. Blue Chip economists had expected an average gain of +29% in real GDP for the quarter and project +3.8% for the Fourth Quarter. Looking forward, as nations manage through the Covid-19 pandemic and vaccines become available, we expect positive economic growth for 2021. Currently, our leading industry group indicators reflect overweightings in Financials, Information Technology, Materials and Communication Services, and underweightings in Consumer Discretionary and Utilities. We believe this strategy is well positioned with its multifactor approach favoring stocks with cheaper valuations, stronger fundamentals, positive earnings/revenue estimate trends and attractive technicals.
The views expressed represent the opinions of the portfolio managers as of November 30, 2020. There can be no assurance that the same factors would result in the same decisions being made in the future. In addition, the views are not intended as a recommendation of any security, sector or product. Returns reported represent past performance and are not indicative of future results. Actual performance may be lower or higher than the performance set forth above. For institutional adviser use only, not intended to be shared with retail clients.