Recent Syntax Research

Regime Shifts: Value regime looks set to last (April Update)

The 3.6% sell-off in the S&P 500 on Friday (4/29) capped a dismal April for the world’s most traded index (-8.72%). 

As we wrote in our February note Regime Shifts: Why the S&P 500 could underperform Alternatively Weighted ETFs, “[the S&P 500] is highly exposed to several potential headwinds in 2022, including interest rate hikes, rising vaccination rates, increased regulation, and overly optimistic valuations. A change in the prevailing market dynamic could cause one (or more) of these headwinds to reverse the long-run market trends and see cap weighted indices underperform alternatively weighted products. The Stratified LargeCap Index outperformed its cap weighted counterpart by 3.12% in April.” 

Passive Perspectives : First Quarter 2022

 Key Points 
  • Major benchmarks fell in Q1; Stratified LargeCap index outperformed
  • Investors are positioning for persistent inflation
  • Regime Shift from Growth to Value benefits Alternative Weight indices 
  • Market turbulence prompts move to defensive groups 

Regime Shifts

Why the S&P 500 could underperform Alternative Weighted ETFs: an analysis of three types of regime shifts and how they may cause headwinds for the S&P 500 and other cap-weighted strategies.

Passive Perspectives: Fourth Quarter 2021

  • S&P 500 finishes 2021 with strongest quarter amidst supply chain relief 
  • Omicron surge keeps interest rates suppressed, supporting tech stocks 
  • Thematic Trends: airlines plummet while autos rally 
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  • New trends emerge in Q3 as pandemic contagion hits supply chain. Consumer goods and transport & logistics stocks are most affected.
  • Software companies, with low supply chain exposure, outperformed in Q3, boosting US cap weighted benchmarks. 
  • Companies with recurring revenue streams rewarded with higher multiples in Q3.

The crippling supply chain problems, which were widely reported in September and early October, are now being discounted as a transitory hiccup, rather than a more troubling symptom of the Pandemic. Using Syntax’s Affinity data, we calculate the supply chain exposures of a wide range of benchmarks and show the impact of the supply chain volatility in September and October. 
At its heart, portfolio management involves managing risk. Random shocks often occur, affecting groups of companies that share the same business risks. For example, Technology companies, which can be found in many different sectors, sharply sold off at the start of this week (10.4.21). The sell-off was led by Interactive Media & Services (-3.08%), Semiconductors (-2.76%), Software (-2.29%) and Hardware (-2.22%), while the market was down 1.30% and the average stock down only 0.63%. With technology companies spanning several sectors and trading as a thematic group, we question whether investors are aware of their total exposure to the technology theme. 
  • COVID concerns cause headwind for Alternative Weight strategies
  • High demand for infrastructure suppliers and companies with recurring revenues
  • Real estate construction stocks underperform amidst higher input prices

  • Q1 2021: Stratified LargeCap +11.0%; S&P 500 +6.2% 
  • Investors seek value in every sector 
  • Small Caps resurgence shows no signs of slowing down 
  • Affinity Themes: Investing in the commodities rebound 

2020 saw a boom in US IPOs, with record numbers in Healthcare and Technology, though a conspicuous absence in Energy. The attached report uses Syntax's unique Affinity™ data to provide a deeper understanding of the key trends driving this surge in IPO activity.
One year on from the trough, equity markets have rallied to new highs and the Stratified LargeCap Index is up 89.8%, outperforming the S&P 500 by 12%. With the rally looking long in the tooth and market multiples remaining close to March 2000 highs, we believe a rotation is just getting started as investors seek diversification and valuation opportunities away from cap-weighted products.

Today, cap-weighted indices like the S&P 500 are more biased and concentrated towards mega cap technology stocks than they were in March 2000. Unlike the DotCom bubble, the risk this time may not be a tech collapse, but that the rest of the market is undervalued and underrepresented in investors’ portfolios. Stratified Weight indices are designed to allocate more equally to sectors and industries to better capture the broad equity risk premium.

Following several years of underperformance, investors are showing a renewed interest for small cap stocks. The S&P SmallCap 600 index rose 31.3% in Q4 2020, outperforming the S&P 500 by 19.2%. The Syntax Stratified SmallCap Index showed even stronger performance, rising 32.0%. 
The strong performance could signal an investor preference for the growth potential of small cap companies, coupled with their reasonable valuations, especially relative to their large cap counterparts.
  • Stratified Indices continue their strong performance in Q4
  • Sector Reversal: the value trade builds momentum
  • Thematic Exposure: Inflation in focus
  • Dollar Weakness: S&P 500 more exposed to foreign revenues than Stratified LargeCap
Thematic investing involves building portfolios in order to capitalize on secular trends. Rather than investing in a single sector, such as financials, thematic investing offers focused exposure to a strategic opportunity that can cut across several different sectors. Learn how Syntax's Affinity data can construct precisely targeted thematic investments.
Climate change is an increasingly critical area of interest for investors, but many of the popular ex-fossil fuel funds on the market miss out on significant sources of fossil fuel risk. In this video, Maggie Bolas talks about how Syntax's Affinity data can create comprehensive fossil fuel screens and build targeted clean energy portfolios.
  • Rally continues in Q3, but September highlights need to diversify
  • September decline coincides with Value outperforming Growth
  • International indices overexposed to Banking risks 
  • Energy risks weigh on performance, especially for Small Caps
  • Economic Breadth Indicator points to modest gains in Q4 2020
Syntax Creates New ESG Index that Aims to Improve Portfolio Outcomes.
Just like everyone knows that we need to wear masks to stay safe, everyone knows that diversification and valuation are important considerations when constructing investment portfolios. But a “safety in numbers”, herd mentality has driven everyone into the same securities and investors are currently buying Amazon stock with the same intensity that they bought Clorox wipes from the Amazon website in April.

  • Unprecedented stimulus helps boost asset prices in Q2, but Coronavirus concerns linger
  • Broad-based recovery in all equity benchmarks following sell-off in Q1 sees diversified indices outperform cap weight in Q2
  • Stratified SmallCap (+30.3%) and MidCap (+27.9%) have strongest quarter on record
  • Resurgence in COVID-19 cases stalls industry reversals, but value opportunities remain
  • Economic Breadth Indicator suggests demand for equities is robust

The risk reduction benefits of diversification are well understood by investors and form the cornerstone of risk management. This paper shows that diversification can also improve upside capture and lead to higher portfolio returns. 

As the market leadership shifts from mega-cap technology stocks to a more value oriented focus, we wanted to highlight the attractiveness of our Stratified Weight Indices. So far this quarter, our flagship indices have significantly outperformed their benchmarks in all categories (US Large Caps, Mid Caps, Small Caps and International).

  • Market decline in Q1 2020 sees higher volatility than during the financial crisis
  • Alternative Weight indices struggle to keep up with cap weight during flight to safety
  • Market concentration is at the highest levels since 1978
  • Previous recoveries have seen headwinds for momentum strategies, causing cap weight to underperform alternative weight products
In 2019, there were a total of 129 Initial Public Offerings (IPOs) in the United States. By number of IPOs, the Healthcare sector dominated, representing 48.8% of the 2019 IPOs. The next largest sector by number of IPOs, Financials, represented only 15.5%. The concentrations of IPOs in the Healthcare and Financials sectors represent a heavy weighting in certain business risks of new stock into the economy, however it does not tell the full story. While the Healthcare sector accounted for a significant plurality of IPOs in 2019, the Information sector took in a much greater share of the total market capitalization, with just over $104.9B. That is, 48.8% of the value of newly listed public companies came from the Information sector. This massive amount of funding is made all the more interesting due to the fact that there were only fifteen Information sector IPOs.

The root cause of the current market crisis is markedly different from anything we’ve seen before. However, the broad risk aversion, chaotic markets and divergence of sector performance has many of the hallmarks of the 2008 Global Financial Crisis. In this report, we examine the trajectory of the 2008 sell-off and subsequent recovery using our unique business risk lens and give actionable insights. If the 2008/9 hindsight is indeed 20:20, there are two ways to add value to our core portfolios: (i) rebalancing after the broad-based sell-off and (ii) reducing business risk concentrations during periods of high uncertainty. We will explore these two strategies in more detail and take stock of the market today. 
Since the first cases of Coronavirus were publicly identified in Wuhan at the end of 2019, the market has experienced significant decline as investors face uncertainty about the outbreak’s effects on corporate earnings. Using Syntax’s Functional Information System (FIS®) to evaluate shared business risks, we can granularly understand how the virus has specifically impacted the Tourism industry and the broader market. 
Markets climb the wall of worry without a harness 
  • 30 for 30: S&P 500 up over 30% - 4th best annual return in 30 years
  • Active Business Risk: most concentrated market since June 1999
  • Alternative Weight indices struggle to keep up with Cap Weight
  • Small Cap resurgence in Q4
  • Brexit and trade war news eases uncertainty internationally
  • Sectors: Healthcare and Financials outperform in Q4 after lagging
When investors think about diversification, they are usually looking to reduce downside volatility. However, a more diversified approach can be just as helpful in enhancing returns during a market recovery. The S&P 500 Financials Sector has given investors a turbulent ride over the last decade. Since that index peaked on February 20, 2007, it has had an incredibly sluggish recovery. Just yesterday, almost thirteen years after the last peak, the index achieved a new all-time high. The Stratified LargeCap Financials Index, on the other hand, recovered from the financial crisis five years ago.
Building on the concept of active share, Syntax has developed a new measure of portfolio risk called Active Business Risk. This white paper introduces Active Business Risk as the excess level of sector or industry exposure in a portfolio or index and shows that Active Business Risk is an important driver of portfolio return. It concludes that Active Business Risk is a quantifiable risk that is not adequately diversified by cap weighted indices. 

  • US Large Cap has strongest YTD since 1997
  • VIX and S&P 500 both rise in Q2 and Q3 - suggests more volatility to come
  • Tech sector sees a renewed focus on valuation
  • Active Business Risk: Core products are heavily biased
  • Markets rise, but volatility reemerges as macro business risks linger
  • Cap-weighted indices under pressure as DoJ investigates Big Tech
  • Healthcare in the cross hairs of political posturing 
  • International markets vulnerable as global economic uncertainty rises
  • Smaller companies lag 
  • Best Q1 for S&P 500 since 1998, SYLC outperforms
  • Stratified MidCap beats S&P 400 in 2018
  • Cap-weighted indices' uncontrolled sector biases
  • International markets rebound in Q1
  • Broad market recovery, but financials lag

  • Market performance in December worst since Great Depression
  • The downturn in Q4 was market-wide. We expect Stratified Weight to outperform as Business Risk trends emerge in recovery
  • FAANGs lose their bite
  • SEADM outperforms EAFE by 2.6% in 2018
  • Stratified LargeCap outperforms Equal Weight by 1.2% in 2018
  • Stratified MidCap outperformed the S&P MidCap 400 by 3.6% in 2018
  • Strongest quarter for S&P 500 since 2013 Q4; strong performance by SYLC
  • Rising macro risks highlight that diversification matters
  • IT and Information business risks start to diverge
  • Interest rates and tax changes create headwinds for home builders
  • Energy leads SEADM on the back of Brent price recovery and merger activity
On September 28, 2018, S&P Dow Jones Indices and MSCI Inc. implemented the largest structural change to the Global Industry Classification Standard to date, significantly broadening the GICS Telecommunication Services sector to include a host of new companies and renaming it the Communication Services Sector. In this report, we discuss the new GICS changes through the lens of the Syntax Business Risk Taxonomy. 
This report analyzes business risk exposures present in the S&P 500 over the previous 25 years using Syntax’s Functional Information System (FIS). Unlike traditional industry classification systems, which offer a one-dimensional, static, taxonomical approach to classification, FIS utilizes a multi-dimensional attribute classification system to better understand underlying risk exposures in investment portfolios. 
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