Performance does not reflect fees or implementation costs as an investor cannot directly invest in an index.

The S&P 500 had its best first quarter performance in 20 years, with the cap-weighted index returning 13.6%. In spite of this strong performance, better diversification was rewarded this quarter: the Stratified LargeCap Index returned 14.9%, outperforming the S&P 500 1.3%. 7 out of 8 stratified weight sectors outperformed their cap-weighted analogue. The “banner” quarter was largely driven by a stunning reversal in the hawkish tone from the Fed, which had triggered the market sell-off in Q4 2018. Equities rallied in all large and mid cap domestic sectors as well as internationally. 

The equity market sell-off in Q4 2018 was driven by discount rate expectations from the Fed (rather than specific earnings trends) and hence affected the entire market. As we mentioned in our last quarterly review, such market-wide sell offs are often followed by a market-wide recovery, where Stratified Indices outperform their cap-weighted counterparts (e.g. March 2003 or March 2009). Q1 2019 followed such a pattern - the Stratified LargeCap rose 14.9% (following a -13.2% sell-off in Q4 2018).

Performance does not reflect fees or implementation costs as an investor cannot directly invest in an index. The inception date of the Stratified LargeCap Index is December 27, 2016. Data for this index prior to that date is backtested. Please see important disclaimers regarding backtested data prior to inception.

Note that the rebound in the two previous market-wide sell-offs (2002 & 2008) for Stratified Weight was stronger than the sell-off. So even though Stratified Weight has recovered its Q4 2018 losses, it is not necessarily the end of the rally.

Performance does not reflect fees or implementation costs as an investor cannot directly invest in an index.

Q1 2019 was even more positive for the mid cap universe, with the S&P MidCap 400 returning 14.5%, outperforming the S&P 500 by 85bps while the Stratified MidCap
returned 14.4%. This quarter’s strong performance demonstrates the benefits of maintaining exposure to the mid cap universe as well as the large cap universe. The Stratified MidCap Index provides this exposure without the related business concentrations of the cap weight.

 

Over the past 12 months, the Stratified MidCap Index (+5.9%) outperformed the S&P MidCap 400 Index by 3.3%, delivering over twice the performance of the cap-weighted index (2.6%).

 

While Q1 saw strong performance across the board, there were notable differences in the performance of groupings in the large cap and mid cap universes. This highlights the differences between the universes and the need for a diversified index to best capture the exposure to each.

In contrast, Stratified Indices have an equal business risk weighting and exhibit far more consistent returns across different universes. This was seen in Q1 2019 returns as the Stratified LargeCap and Stratified MidCap returned 14.9% and 14.8% respectively (vs. 13.6% and 14.5% for the cap-weighted 500 & 400 universes).

 

The effect was even more pronounced for 12 month returns. Stratified weight returns were relatively consistent at 8.8% and 6.2% for the LargeCap and MidCap, respectively. Whereas the cap-weighted S&P 500 and S&P MidCap 400 had very different 12 month returns, 9.5% and 2.6% respectively.

Performance does not reflect fees or implementation costs as an investor cannot directly invest in an index.

Performance does not reflect fees or implementation costs as an investor cannot directly invest in an index.

The strong performance in domestic equities was mirrored in international markets. The Stratified Europe & Asia Developed Markets (SEADM) rose 9.2% in Q1 2019, slightly underperforming MSCI EAFE (+10.0%). All stratified and cap weight sectors had positive returns over the most recent quarter. Over the past year, SEADM outperformed MSCI EAFE by 1.4%, weathering the global volatility better than cap weight due to its superior diversification of business risk. 

 

The planned US tariff increase on Chinese goods was postponed from 1st March, which eased tensions. Trade talks continue, the most recent round of talks finished on Friday 29th March and were described as “constructive”; however, a deal is yet to be struck. Given this uncertainty, a diversified international exposure may be preferable to investors.

Concerns that rising short rates could spark a recession saw longer-term bond yields fall dramatically (e.g. 10 and 5 year) and the yield curve inverted (briefly for 10yr vs 3m, 5yr vs 3m remains inverted). A negative yield curve is usually bad news for the banking sector as net interest margins become squeezed. 

 

The cap-weighted Financials sector underperformed the market by over 3% (+10.1%), but Stratified Financials (+13.7%) outperformed the S&P 500 market (+13.6%) given its superior diversification.

 

 

In the large cap and mid cap universes all sectors delivered strong returns. Even at the lowest level groupings performance was almost universally positive: only 3 of 128 bottom-level risk groups in the Stratified LargeCap Index were negative in Q1 2019, and in the Stratified MidCap Index only 1 of 94 bottom-level risk groups was negative. 

Only 43 securities in the large cap universe, and 46 securities in the mid cap universe, had negative returns over the quarter.

Past performance is no guarantee of future results. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The inception date of the Syntax Stratified LargeCap Index and Syntax Stratified Sector Indices was December 27, 2016. The inception date of the Syntax Stratified Europe & Asia Developed Markets Index was January 1, 2016. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back-tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index. Charts and graphs are provided for illustrative purposes only. 

The Syntax Stratified LargeCap Index, Syntax Stratified MidCap Index, and Syntax Europe & Asia Developed Markets (“SEADM”) Index are the property of Syntax, LLC, which has contracted with S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC) to calculate and maintain the Indices. The Indices are not sponsored by S&P Dow Jones Indices or its affiliates or its third party licensors (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices will not be liable for any errors or omissions in calculating the Index. “Calculated by S&P Dow Jones Indices” and the related stylized mark(s) are service marks of S&P Dow Jones Indices and have been licensed for use by Syntax, LLC. S&P® is a registered trademark of Standard & Poor's Financial Services LLC (“SPFS"), and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). The MSCI EAFE Index was used by Syntax, LLC as the reference universe for selection of the companies included in the SEADM Index. MSCI does not in any way sponsor, support, promote or endorse the Index. MSCI was not and is not involved in any way in the creation, calculation, maintenance or review of the Index. The MSCI EAFE Index was provided on an “as is” basis. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating the MSCI EAFE Index (collectively, the “MSCI Parties”) expressly disclaim all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non‐infringement, merchantability and fitness for a particular purpose). Without limiting any of the foregoing, in no event shall any of the MSCI Parties have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages in connection with the MSCI EAFE Index or the SEADM Index. Prior to March 19, 2018, the SEADM Index was calculate by NYSE. Sector subsets of the Syntax Stratified LargeCap, Syntax Stratified MidCap, and SEADM Indices are calculated using model performance generated in FactSet, and as such may differ from index calculations performed by S&P Dow Jones Indices. Syntax®, Stratified®, Stratified Indices®, Stratified-WeightTM, and Locus® are trademarks or registered trademarks of Syntax and its affiliate Locus, LP. FactSet® is a registered trademark of FactSet Research Systems, Inc. 

Index performance does not represent actual fund or portfolio performance and such performance does not reflect the actual investment experience of any investor. An investor cannot invest directly in an index. In addition, the results actual investors might have achieved would have differed from those shown because of differences in the timing, amounts of their investments, and fees and expenses associated with an investment in a portfolio invested in accordance with an index. None of the Syntax Indices or the benchmark indices portrayed herein charge management fees or incur brokerage expenses, and no such fees or expenses were deducted from the performance shown; provided, however that the returns of any investment portfolio invested in accordance with such indices would be net of such fees and expenses. Additionally, none of such indices lend securities, and no revenues from securities lending were added to the performance shown.  

The S&P 500® Index is an unmanaged index considered representative of the US mid- and large-cap stock market. The MSCI EAFE Index is an unmanaged index considered representative of the European, Australian, and East Asian large-cap stock market. Benchmark data for the S&P 500 and S&P MidCap 400 Indices are provided by S&P Dow Jones through FactSet®. Benchmark data for the MSCI EAFE index is provided by MSCI through FactSet.

This document is for informational purposes only and is not intended to be, nor should it be construed or used as an offer to sell, or a solicitation of any offer to buy, any security. Additionally, the information herein is not intended to provide, and should not be relied upon for, legal advice or investment recommendations. You should make an independent investigation of the matters described herein, including consulting your own advisors on the matters discussed herein. In addition, certain information contained in this factsheet has been obtained from published and non-published sources prepared by other parties, which in certain cases have not been updated through the date hereof.  While such information is believed to be reliable for the purpose used in this factsheet, such information has not been independently verified by Syntax and Syntax does not assume any responsibility for the accuracy or completeness of such information. Syntax LLC, its affiliates and their independent providers are not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein.

Certain information contained in this presentation is non-public, proprietary and highly confidential and is being submitted to selected recipients only. Accordingly, by accepting and using this factsheet, you will be deemed to agree not to disclose any information contained herein except as may be required by law. This factsheet and the information herein may not be reproduced (in whole or in part), distributed or transmitted to any other person without the prior written consent of Syntax. Distribution of Syntax data and the use of Syntax indices to create financial products requires a license with Syntax and/or its licensors. Investments are not FDIC insured, may lose value and have no bank guarantee.