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2019: Equities in a stylish nutshell

Most equity investors were taken by surprise when the MSCI World index rose more than 27 % last year. Now, with all analysis in, it’s time to look at the numbers and hopefully learn something.

Finance Blog

Ole Jakob Wold

Ole Jakob Wold is Portfolio Manager and the Head of our Systematic Active Equity team.

Ole Jakob joined DNB Asset Management in January 2017. He then came from a position as Portfolio Manager in Guggenheim Partners which he held for seven years. Before that he was the Head of Global Equities in Alfred Berg Asset Management for many years.

Ole Jakob is a Civil Economist from the Norwegian School of Economics (NHH).

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The MSCI World index rose more than 27% in USD during 2019, and the index ended the year near all-time high. Most equity investors did not quite see this coming, and the strong performance in Q4 was probably fueled by investors joining the party after macro tensions around the US/Chinese trade war and because Brexit worries eased somewhat.

How did the different equity styles perform in 2019?

The world index fell in May and August, but the rest of the year posted good returns with very low risk. With all analysis in, it is time to look at the numbers: How did the different equity styles perform?

The Systematic Active Equity group at DNB has defined five styles. We sort and categorize companies according to their exposure to:

  • Value,
  • Growth,
  • Profitability,
  • Quality and
  • Momentum.

This means that we can analyze the effects style had on the MSCI World Index.

We analyze the numbers in quintiles

We use quintiles[1] to do this. This means that we rank MSCI world index members on style exposure every month, and track the performance of five groups. Quintile 1 follows the performance of the companies with lowest style exposure. Quintile 5 has the companies with highest exposure. This gives us this view of performance of Risk Quintiles in 2019:

The graph on the right shows performance of Risk Quantiles, and the left hand graph shows average weights in these Quantiles. As you might expect in a strong equity market, it appears that high risk names performed significantly better than the low risk names this year. The performance spread between Q5 and Q1 was more than 10 percentage points.

Value stocks or Growth stocks: Which was better?

Growth stocks[2] are generally expected to outperform the overall market over time because of their future potential. However, value stocks[3] can trade below what they are really worth and will therefore theoretically provide a superior return.

Last year there was a lot of talk about the value/growth reversal. Value stocks have been underperforming growth stocks over a very long period, and the valuation spread is at levels never seen before.

In second half of 2019, Value stocks did indeed outperform growth stocks. The graphics below shows quintile performance for value of the last six months of 2019:

The value performance in the first six months of 2019 however was very low, and the full results for all styles in 2019 shows this picture:

In 2019 the value/growth valuation gap widened

This table is sorted on the Q5-Q1 performance spread. So, last year, the value/growth valuation gap widened further. Profitability as a style also performed well in 2019, and it was the top performer in the first half.

The growth style performed well in first and second half, together with risk.

Most quantitative researchers will agree that momentum strategies[3]struggled in 2019. In our analysis, momentum was the worst performing style, as seen in the quintile analysis below:

The performance spread between high and low momentum stocks was lower than -22 % for the year. This is very low. We should mention that the momentum ranking used here is a mix of short and long momentum.

So, as a style performance wrap up of 2019, it was a "risk on" year with profitability and growth outperforming the other styles. Value gained some ground the last six months.

See tables below for first and second half year quintile-performances:

[1] Quintile/ Quantile: In statistics a quintile is when a sample of numbers or a population is divided into fifths.

[2] Growth stocks: A stock of a company whose revenues and earnings have increased at a faster rate than the average company.

[3] Value stocks: A stock that trades at a lower price relative to its fundamentals, such as earnings or sales.

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