Equity market returns have been choppy in recent months, as investors have reacted to mixed economic data, geopolitical events, and the potential for a global trade war. Going forward, what market factors could impact equity returns? Likewise, what opportunities and risks should investors keep an eye on in today’s uncertain market environment? To gain insight we recently spoke with Andrew Ver Planck, CFA, who serves as Portfolio Manager and Head of Systematic Equity Team.

Will the Momentum Factor Continue to Dominate?

After strong performance results last year, momentum- and trend-following factors have been the primary driver of global equity returns in 2018. This trend, while dominant within information technology, has also been robust within consumer discretionary, health care, and select areas of the energy sector. Conversely, valuation-type factors have faced meaningful headwinds that have been exacerbated by rapid geopolitical changes and the threat of tariffs in several countries. This trend, however, is not indefinitely sustainable and will eventually reverse course. Investors can avoid the guess work and consequences of market timing through a core equity allocation that maintains an optimal combination of factors (momentum, sentiment, and valuation).

Strong Fundamentals with Productivity Gains

Despite near-term volatility, corporate fundamentals within the U.S. and much of the world are generally robust. This has been evident by solid earnings growth, as well as strong sales revision trends across most sectors. Equity valuations have been supported by productivity gains from innovation and disruptive technologies, along with strength from consumers.

Tailwinds from U.S. Tax Reform

As the strong first quarter earnings season demonstrated, U.S. companies as a whole have received a boost from U.S. tax reform. While this has been somewhat reflected in equity valuations, we believe there is room for further upside. Most market participants do not know how the impact from tax reform will ultimately play out. What’s more, the cumulative effects can be latent and underestimated. And, while tax reform’s positive impact on consumer disposable income is irrefutable, the effects are indirect and complex to measure. In addition, consumer spending is tied to other factors, including labor market conditions.

How Can Investors Get More from Their Core?

As we enter a period of quantitative tightening, we are likely to see greater differentiation among stocks, particularly as price-to-earnings (P/E) multiple expansion becomes less dominant and investors once again reward growing companies with superior fundamentals. However, most traditional investors overlook the alpha potential that can be achieved by exploiting investment opportunities among challenged companies with weaker fundamentals. Investors who focus solely on long-only opportunities, in essence, have an “opportunity cost” that ignores the greater capital appreciation or “double alpha” potential that can be achieved from short investing.

The Systematic Equity Team at MacKay Shields believes an active extension strategy with a systematic, long/short discipline is the most effective way to build portfolios that provide an attractive trade-off between risk and return. Below are a few key reasons why sophisticated investors pursue strategies with opportunistic shorting:

GREATER FLEXIBILITY: Ability to fully leverage research insights.

UNCORRELATED ALPHA POTENTIAL: Exposure to performance drivers that do not move in tandem.

MORE EFFECTIVE RISK CONTROL: Avoid market capitalization bias and undesirable exposures.

INCREASED ACTIVE SHARE: Exploit interactive benefits of stocks without losing diversification.

Source: MacKay Shields


Given this stage of the economic cycle, it’s not surprising to see some factors that could negatively impact the global growth trajectory. Perhaps first and foremost would be sharply rising interest rates. Should this occur, higher borrowing cost could crimp household spending and cause businesses to pull back hiring and other investment plans, especially if fiscal stimulus fades. An increase in geopolitical tensions and uncertainty over trade policy may also impact investor sentiment and result in a spike in market volatility. Careful stock selection based on a systematic framework and valuation discipline can help identify quality companies and separate the “winners” from the “losers.”


The stock selection model evaluates each stock in the universe across three factors: Valuation, Momentum, and Sentiment. Valuation measures a stock’s cash flow and sales multiples relative to its peers. Momentum measures stock price and industry price movement and trends. Sentiment measures analysts’ earnings estimates and stock loan market place activity.


Active Share is a measure of the percentage of stock holdings in a manager’s portfolio that differs from the benchmark index. The researchers conclude managers with high Active Share outperform their benchmark indexes and Active Share significantly predicts fund performance.

Alpha measures a fund’s risk-adjusted performance and is expressed as an annualized percentage.

MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.

MSCI ACWI Momentum Index is based on MSCI ACWI Index and is designed to reflect the performance of an equity momentum strategy by emphasizing stocks with high price momentum.

MSCI World Index is a free float‐adjusted market capitalization weighted index that is designed to measure the equity performance of 24 developed markets. P/E Ratio (price‐to‐earnings) denotes the weighted average of all the P/Es of the securities in the fund’s portfolio.