By design, the Active Quantitative Equity (AQE) team’s alpha model favors securities with high-quality balance sheets, reasonable growth expectations, improving market sentiment, and attractive valuations. Focusing on these themes can lead to differences over time in the riskiness of our most preferred stocks.
Because of current market conditions, our most preferred stocks at the moment are, in total, quite a bit less risky than the average stock. In fact, each of the three main themes we focus on — Value, Quality, and Sentiment — are all pointing toward lower-risk names than has been typical for AQE over time (see Figure 1).
Correlation of Expected Returns with Risk
However, this does not mean we only like low-risk segments of the market. Our systematic, bottom-up approach currently favors some high-risk segments, while we have a negative outlook on some low-risk segments.
By some measures, the Energy sector is high risk; however, we hold a very positive view of that sector overall. How can this be? Let’s take a closer look.
Due to the tremendous increase in both Sentiment and Quality metrics within the Energy sector over the last year, as well as the improving Valuation scores, our model sees the Energy sector — broadly one of the highest-risk segments of the market — as the most attractive of all sectors.
As of the end of May, the Energy sector on average, using our measure of risk, is the second most risky sector, only trailing Consumer Discretionary stocks, the riskiest sector, by a tight margin. While the Energy sector is up over 50% year to date, earnings-per-share (EPS) growth estimates are up over 60% this year, outpacing the index. We think the Energy sector is even more of a bargain than it was at the start of the year. This has led to a decline in the price-to-earnings ratio (P/E) of the sector broadly. As a result, we continue to find opportunities in the sector. A few segments of the Energy sector that we like are highlighted in Figure 2.
Segments of Interest in Energy Sector
Real Estate is another sector that shows how our process, although risk-aware, is not overly constrained by its influence. The Real Estate sector is one of the least risky; however, it ranks as one of the lowest categories from our total alpha perspective. This is largely driven by extremely poor valuation across the board, coupled with varying levels of Quality and relatively average Sentiment metrics. Real Estate has had a challenging year to date — down nearly 15% — while EPS estimates for the sector have been flat. We do not see this trend easing, particularly on the corporate Real Estate side, as companies move to more remote and hybrid return-to-work models for their workforces.
Although the sector has experienced a slight decline in multiples, we still view the sector as more expensive than other parts of the market. When combined with unappealing Quality and Sentiment scores, our outlook for the sector becomes poor (see Figure 3).
Real Estate Assessment Across Metrics
The Bottom Line
Risk is often associated with a particular sector or segment of the market. In reality, however, risk usually does not appear in isolation. Instead, risk manifests within sectors, industries, regions, or countries (or combinations of these) simultaneously. In assessing risk and its complexities, the AQE team relies on a balanced, disciplined, and diversified bottom-up approach, which allows us to effectively target opportunities as they present themselves — even when views on risk within sectors diverge.
For use in EMEA: The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
This communication is directed at professional clients (this includes eligible counterparties as defined by the appropriate EU regulator) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons, and persons of any other description (including retail clients) should not rely on this communication.
Important Risk Information
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Investing involves risk including the risk of loss of principal.
The views expressed are the views of Active Quantitative Equity through June 13, 2022, and are subject to change based on market and other conditions.
Quantitative investing assumes that future performance of a security relative to other securities may be predicted based on historical economic and financial factors, however, any errors in a model used might not be detected until the fund has sustained a loss or reduced performance related to such errors.
Equity securities may fluctuate in value and can decline significantly in response to the activities of individual companies and general market and economic conditions.
Before investing, consider the funds' investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information, call 1-800-997-7327, download a prospectus or summary prospectus now, or talk to your financial advisor. Read it carefully before investing.
Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, an indirect wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SSGA Funds.
THIS SITE IS INTENDED FOR U.S. INVESTORS ONLY.
No Offer/Local Restrictions
Nothing contained in or on the Site should be construed as a solicitation of an offer to buy or offer, or recommendation, to acquire or dispose of any security, commodity, investment or to engage in any other transaction. SSGA Intermediary Business offers a number of products and services designed specifically for various categories of investors. Not all products will be available to all investors. The information provided on the Site is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.
All persons and entities accessing the Site do so on their own initiative and are responsible for compliance with applicable local laws and regulations. The Site is not directed to any person in any jurisdiction where the publication or availability of the Site is prohibited, by reason of that person's nationality, residence or otherwise. Persons under these restrictions must not access the Site.
Information for Non-U.S. Investors:
The products and services described on this web site are intended to be made available only to persons in the United States, and the information on this web site is only for such persons. Nothing on this web site shall be considered a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.