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Factor Performance Report Summary - Emerging Markets Small Cap

Introduction

This report provides an analysis of the performance of 23 individual equity factors relative to the Emerging Markets Small Cap region, covering various time frames from one month to five years. The analysis is conducted using two adjustment methods: "Sector Adjusted" for single-country regions and "Country and Sector Adjusted" for multi-country regions. The goal is to isolate factor performance from sector and country-specific effects, ensuring that the results reflect the true impact of each factor on returns.

Methodology

• Factor Portfolio Construction: A single factor portfolio is created by sorting securities in descending order according to a specific factor (e.g., Book to Price). The top 50% of securities by factor value are selected to form the portfolio, ensuring it represents the "top half" of the market by that factor.
• Performance Measurement: The performance of the factor portfolio is measured relative to the entire market for each defined time frame (1 month, 3 months, 6 months, YTD, annualized 1, 3, and 5 years).
• Adjustment Process: For single-country regions, "Sector Adjusted" analysis is used. For multi-country regions, "Country and Sector Adjusted" analysis is applied, which adjusts data based on the country of domicile and sector to avoid confounding factor effects with regional or sectoral influences.

Factor Definitions

The report includes the following categories of factors:

Value Factors

• Book to Price: Ratio of book value to share price, indicating intrinsic value.
• Earnings Yield: Annual earnings per share divided by share price, reflecting earnings support.
• Cash Flow Yield: Annual cash flow per share divided by share price, capturing cash availability.
• Sales to Price: Net sales per share divided by share price, measuring sales support.
• EBITA to EV: Ratio of EBITDA to Enterprise Value, assessing company valuation.

Yield Factors

• Dividend Yield: Annual dividend per share divided by share price, reflecting dividend income.
• Shareholder Yield: Sum of Net Buyback Yield, Dividend Yield, and Net Debt Paydown Yield, measuring value distribution to shareholders.

Growth Factors

• Earnings Growth 5Y: Average annual growth rate of earnings over the past five years.
• Sales Growth 5Y: Average annual growth rate of net sales per share over the past five years.
• Forecast Growth 12M: Consensus forecast of earnings growth for the next 12 months.
• Dividend Growth 5Y: Average annual growth rate of dividends over the past five years.

Quality Factors

• Return on Equity (RoE): Net income after preferred dividends divided by book value of common equity, measuring profitability.
• Net Profit Margin: Net income (before preferred dividends) divided by net sales, indicating profitability potential.
• Low Gearing: Negative of debt to equity ratio, reflecting lower financial leverage and higher quality.
• Earnings Growth Stability: Negative of the standard deviation of earnings growth over the past three years.
• Sales Growth Stability: Negative of the standard deviation of sales growth over the past three years.

Size Factors

• Market Cap: Market capitalization of the stock, used to measure the size of the company.

Volatility Factors

• Market Beta: Slope coefficient from a regression of security returns against market returns, measuring sensitivity to market movements.
• Daily Volatility 1Y: Annualized standard deviation of daily total returns over the last year.
• Volatility 3Y: Annualized standard deviation of total returns over the last 36 months.

Momentum Factors

• Momentum ST: Measures the performance trend following using a 6-month "memory" of monthly returns, weighted with a decay ratio of 2/3 per month.
• Momentum 12-1: Total return over the last 12 months, excluding the most recent month to avoid reversal effects.
• Forecast 12M Revisions: Measures the balance of earnings forecast revisions for the next 12 months, expressed as a percentage of the number of estimates.

Key Information

• Time Frames Covered: 1 month, 3 months, 6 months, YTD, 1 year, 3 years annualized, 5 years annualized.
• Stock Definition: Emerging small cap stocks are defined as those with market capitalization between $50 million and $2 billion.
• Analysis Purpose: To provide objective and comprehensive factor analysis for investment professionals, enabling better decision-making based on factor exposures.
• Company Background: Style Analytics has over 20 years of experience and serves more than 280 investment institutions across 30 countries.

Conclusion

The report offers a detailed breakdown of how various factors (value, yield, growth, quality, size, volatility, and momentum) have performed in the Emerging Markets Small Cap region. By using consistent methodologies and adjustments, it provides insights into which factors have been most effective in driving returns and which may have underperformed. This information is crucial for asset managers and consultants to evaluate and optimize their investment strategies based on factor-based insights.