A Rare Buying Opportunity in the Global Quality Space?
From the above chart, we can see how pure factors have performed throughout the pandemic period. Large profitable companies significantly outperformed during the initial outbreak and volatility spike in March 2020. Highly leveraged, volatile and value factors underperformed. However as the pandemic evolved there has been a significant turnaround, with high beta volatile stocks clearly outperforming. The profit factor has been the clear loser over the period. Fiscal and monetary response has helped out the more risky elements of the market at the expense of quality. However we think the current period could be an opportunity to allocate to global quality at a reasonable discount to its history and the fundamental factors which drive the performance.
A longer term view of the profit factor suggests that the outperformance into and during the recessionary period is normal. It performs well in risk off events when capital preservation is most required. The chart also shows the current level of post recovery underperformance is extreme and may provide a reasonable entry point into this factor and the global quality style.
At Nutshell, like most global quality funds, the profit factor is one of our most significant factor exposures. That is we are typically significantly overweight quality companies which have high profit margins and high return on equity. From the March 2021 outperformance spike, these quality factors have underperformed and now stand at an extreme low. We believe now is a good time to increase exposure to this factor and allocate to the global quality style.