Trivariate’s Quantitative Framework: March 2022

We detail some of the unique aspects of our quantitative framework, including cohort formation, signal transformation, dynamic grossing, and risk management. We believe this approach can be useful for bottom-up stock pickers seeking to pick from a better pool of names, rigorously manage gross exposures, and avoid risks such as crowding.

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The Case for Small Caps

As we noted at the beginning of the year, SIZE matters. Small caps have had their worst 18-month period of underperformance relative to large caps in the last twenty years, other than during COVID and the Financial Crisis.

In this note, we utilize our proprietary macro-based framework to see if there are certain macro conditions consistent with small cap outperformance, along with examining historical discounts and current margins in small vs large caps. From this, we conclude now may be the inflection point for a small cap turnaround, and give our current top small cap ideas.

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Is There A Post-Energy Spike Playbook?

In light of the recent surge in oil prices, and uncertainty among investors as to what the appropriate playbook is, we examined prior oil spikes in search of patterns. We found six spikes – defined as breaking a threshold of 25% price increase over a 6-month rolling window – in the last 20 years, lasting a median duration of 70 days, and moving around 20% higher on average after the initial tipping point. After looking at these events, we have a few conclusions.

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SP500: A Constantly Enhanced Moving Target

The SP500 is the most followed benchmark for equity investors. In today’s report we take a step back from the recent market turbulence and focus on one of the biggest challenges of beating the SP500 – additions / deletions to the index. For context, over the last 20 years, on average about 5.5% of SP500 companies are added and deleted each year. We decomposed the substantial differences between stocks that are added and dropped from the index to understand the impact. Further, to capture some of the performance of the additions and avoid that of the deletions, we created two proprietary “potential add and potential drop” baskets to the SP500 to create alpha from names just below the top 500 in market cap.

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Rates, Growth, War, and Stocks​

A constant investor question we get is “what playbook should we apply?” The last few months have been stressful for markets, as all of us try to find a relevant historical analog to apply to the next several months. What has happened the last three months? A huge change in the perception about interest rates fueled by multi-year highs on inflation, morphed into a “classic” growth scare, and now a war has created more fodder for the “risk-off” mentality. In the end, however, there are no historical periods that closely parallel today’s regime. In today’s research, we contextualize changes to perceptions about rates, growth scares, and wars to provide some analysis amidst the volatility.

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Thoughts on TMT

Over the past several months we have done a lot of work on growth stocks, and various frameworks for investing in growth. The result of that has been number of ways to generate ideas in the space. With the Nasdaq down 10% YTD, and many individual names down far more, we have received many investor questions asking for us to contextualize the sell-off. This short deck is the “best of” those TMT themes.

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Crowding: Risk and Opportunity

We established a systematic approach to analyzing the high conviction ideas of money managers through their 13F filings. We used this approach to inform recommendations about position sizing, and sometimes whether we would even buy or short a stock. While 13F filing data are lagged, and we do not know any manager’s real exposure as we are not assessing the options market or any short positions, we found it instructive to define a proprietary universe of fundamental managers, define high conviction, and use our quantitative models to improve our ability to find superior and inferior groups of equities.

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Focus On Dividends

We took a detailed look at dividend-related strategies given the massive shift in the perception about the path of interest rates. This report is part of our ongoing research on capital use and its consequences.

We believe there is above normal potential for dividends to matter going forward given the pending Fed lift off and historically wide valuation dispersion among the dividend yielders. Our quantitative models that specifically focus on dividend-yielding stocks are effective for picking winners / losers among this cohort.

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