INSIGHTS Market Insight

As with nearly any trend, be that the latest flared jean or music album, they are ‘cool’ until they aren’t. The same holds true for financial markets. Momentum performs well during trending markets. The most recent decade (2010-19) witnessed the longest bull market in history with global equities returning an average annualized return of +8.5%. It is therefore no surprise that it has been a ‘trendy’ decade with MSCI Momentum achieving an average annualized return of +11.9%.

The Covid-19 pandemic further enhanced Momentum’s performance as investors piled into stocks that were net beneficiaries of ‘working from home.’ However, the announcement of successful vaccine trials at the end of 2020 led to a change in investor sentiment. Investors’ appetite for risk returned with the expectation of economies re-opening. A rotation in market leadership ensued with cyclical stocks outperforming their defensive counterparts. Year to date, Energy and Financials stocks are up 22.5% and 12.5%, respectively, whilst Tech stocks are lagging, up only 2.6%.

Rotations in market leadership are not conducive to the success of traditional Momentum based strategies as portfolios must re-align themselves with the latest trend. As can be seen below, the prevalence of cyclical sectors in a 6-month Momentum basket has been increasing since the first vaccine announcements (November 2020). Financials, Energy and Materials now carry a 4x heavier weight than they did back in October 2020 in favour of tech stocks which have halved in weight.

Whilst there are shoots of the same effect in a 12-month Momentum basket, the risk-on rotation is not yet mature enough for value stocks to feature so prominently in longer-term Momentum portfolios. However, as we go 12-months past the 8-year Value ‘low’ (23rd March 2020), it is likely that this will change, as a longer-term more established trend is formed.

Given the severity of this rotation, it is no surprise that Momentum strategies have suffered this year with MSCI Momentum displaying a -15% drawdown. As investors with Momentum strategies, we remain hopeful that this may be the start a new longer-term trend that will provide us with the market conditions conducive for successful Momentum investing

Disclaimer

This information is provided on a confidential basis by Arabesque (Deutschland) GmbH (together with its affiliates “Arabesque”) in its capacity as fund manager and is for information purposes only solely for those persons who meet the qualifications to be investors in any fund (a “Fund”) managed by Arabesque. The information regarding Arabesque’s investments, strategy, and organization is highly confidential. This document does not constitute an offer to sell or solicitation to purchase any shares in any Fund to any person, and shall not be construed as a recommendation or advice on the merits of investing in the Fund. Prior to any purchase of an interest or shares in the Fund, investors should reference the Fund’s confidential offering memorandum (the “Sales Prospectus”), the key investor information documents, and the subscription documents (all of which are available free of charge by contacting the Registrar and Transfer Agent at 15, avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg or by contacting the relevant local agent of the Fund in their jurisdiction, if applicable), which together contain all the material terms of such an investment, including discussions of certain specific risk factors, conflicts of interest, tax considerations, fees, and other matters relevant to prospective investors in the Fund. All information stated herein is subject to and expressly qualified in all respect by the Sales Prospectus and key investor information documents. An investment in the Fund may be illiquid and involve a high degree of risk. Investments should be considered only by investors who can withstand the loss of all or a substantial part of their investments. No guarantee or representation is made that the Fund’s investment programs, including, without limitation, the Fund’s investment objectives, diversification strategies, or risk monitoring goals, will be successful, and investment results may vary substantially over time. Economic, market, and other conditions could also cause the Fund to alter its investment objectives, guidelines, and restrictions. Nothing herein is intended to imply that the Fund’s investment methodology may be considered “conservative”, “safe”, “risk free”, or “risk averse”. Past performance is not necessarily indicative of future results. No assurance can be made that the investment objective or profits will be achieved, that the strategies employed will be successful, or that substantial losses will not be incurred. The information contained herein does not take into account the particular investment objectives or financial circumstances of any specific person who may receive it. It should not be assumed that the Fund will continue to invest in any of the investments described herein or that such investments will be available in the future. It should not be assumed any investments described herein will ultimately be profitable or that the assumptions regarding future events and situations will materialize or prove correct. Actual investment performance could differ materially from the Fund’s anticipated results. The performance figures noted above are for investments made at the inception of the Fund and include the reinvestment of dividends, interest, and other earnings. An individual investor’s actual returns may differ from the results shown above for reasons such as the timing of subscriptions and redemptions. The numbers shown above are not adjusted to reflect any capital inflows or outflows that may have occurred on or after the last day of the month. Results for the current year are subject to revision upon the year-end audit. Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,“ “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Owing to various risks and uncertainties, actual events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements. To the extent this document includes information related to performance, it is intended to provide a qualitative description of certain of the key investments themes, events, and developments that contributed to the overall performance of the Fund, along with a picture of the overall exposure of the Fund. Such examples are meant to provide insight with respect to each investment and, to the extent applicable, the Fund’s objectives and the investment processes and analyses used to evaluate such investments. Other investments, themes, events, developments, and/or other factors not described herein may have had (and continue to have) a significant impact on the Fund’s overall performance. There may be significant differences between the Fund’s investments and the indexes referenced herein. For instance, the Fund may invest in securities that have a greater degree of risk and volatility, as well as less liquidity, than those securities contained in such indexes. Fund investors may also be subject to a lock-up which further limits the Fund investor’s liquidity relative to an investment in one or more of the securities comprising any index. It should not be assumed that the Fund will invest (or has invested) in any specific investments that comprise any index, nor should it be understood to mean that there is a correlation between the Fund’s returns and the returns of any index. Past performance of the Fund relative to any index should not be indicative of future performance relative to that index. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 50 country indexes comprising 23 developed and 27 emerging market country indexes. The developed market country indexes included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. The emerging market country indexes included are: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Kuwait, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. Neither Arabesque nor any Fund makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein and nothing contained herein should be relied upon as a promise or representation as to past or future performance of the Fund or any other entity. Any prior investment results of the Fund or any of its affiliates and any hypothetical information are presented in this document for illustrative purposes only and are not indicative of the future results of the Fund. Certain information contained in this document has been obtained from sources outside Arabesque. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and none of Arabesque its affiliates or any Fund takes any responsibility for such information. It is the responsibility of investors and prospective investors to enquire about the laws and regulations that apply to the purchase and possession of shares in the Fund and consult their own counsel, accountant or investment adviser in this respect. The Fund is distributed in the EEA pursuant to a passport facilitated under the Directive on undertakings for collective investment in transferable securities (UCITS) Nr. 2009/65/EC dated 13 July 2009 (UCITS Directive) and more globally on a private placement basis in accordance with all applicable laws and regulations. This document is intended for professional investors only, as defined by European Directive 2004/39/EC of 21 April 2004 on markets in financial instruments (MiFID) investing for their own account and not for retail distribution. The Fund complies with the requirements of the UCITS Directive. The Fund has been passported in the European Economic Area for sale pursuant to the procedure set out in the UCITS Directive. The Fund will only be distributed and shares will only be offered or placed in jurisdictions to the extent that it may be lawfully distributed and the shares may be lawfully offered or placed in those jurisdictions (including at the initiative of the investor). The Fund is intended to be offered to U.S. investors pursuant to “private offering” exemptions from registration contained in Regulation 506 under the Securities Act of 1933 and Section 3(c)(7) of the Investment Company Act of 1940. This document may not be copied, reproduced, in any way used or disclosed or transmitted, in whole or in part, to any other person.