Key takeaways

• Venn recently added the ability to identify and aggregate holdings data such as asset class, geography, and sector among mutual funds, ETFs, and individual stocks within Studio and Report Lab.

• A case study presented using Venn’s returns-based analysis identified international exposure for a seemingly U.S.-focused manager, further supported by using Venn’s new holdings features.
   
• Combining returns-based insights with holdings-level context may create a more robust narrative when interpreting manager performance, much as it may do for a multi-asset portfolio as well. 

An important differentiator for the Venn platform is the ability to use only returns to conduct sophisticated portfolio analytics. Advantages to this approach include being able to analyze anything with a return stream, whether it be a unique asset class such as wine, or a private asset manager. The returns-based analysis also has the ability to decompose performance across common risk factors in the market. This can provide transparency into “how” and “why” an investment performed the way it did, despite no transparency into the holdings.

However, even though returns-based analysis is effective without any holdings data, such data can provide additional context for a portfolio or investment manager. As a result, Venn has launched the ability to aggregate holdings data such as asset class, geography, and sector among mutual funds, ETFs, and individual stocks. Currently, holdings data is available in Venn’s Report Lab and Studio modal.¹ We believe this will provide investors with even more context for their returns-based analysis and, importantly, their investment reporting. 

Let’s walk through a case study using Venn’s returns-based analysis and holdings data together, showcasing how putting these features side-by-side can help with understanding risk and crafting investment narratives. 

Starting with returns-based factor analysis
Without conducting any analysis on The Growth Fund of America (AGTHX), one might think from the name that this is a U.S. equity growth fund.² As a result, one might expect large exposure to factors such as Equity and Local Equity, and negative exposure to Value. 

Venn's analysis in Exhibit 1 demonstrates that these three factors are among the most meaningful exposures for this manager over time. (Not shown here is Venn identifying that 81.54% of this manager's risk is driven by our Equity Factor, further suggesting an equity-focused approach.)

Exhibit 1: AGTHX Factor Exposure

Source: Venn by Two Sigma. The chart displays factor analysis for AGTHX viewed through the Two Sigma Factor Lens from 3/1/1995-2/21/2023

Continuing with only returns-based analysis, let's take a look at factor contribution to active risk versus the Russell 1000 Growth (R1G), which we know is a U.S. equity-focused growth benchmark.

Interestingly, Local Equity exposure is now meaningfully negative when looking at active risk in Exhibit 2. This implies that AGTHX has international exposure, or more specifically, that AGTHX is expected to benefit relative to the R1G when international equities outperform U.S. equities.³ 

Exhibit 2: AGTHX Relative Factor Exposure to R1G

Source: Venn by Two Sigma. The chart displays factor analysis for AGTHX viewed through the Two Sigma Factor Lens from 3/1/1995-2/21/2023. Relative to benchmark analysis is relative to the Russell 1000 Growth Index. 

This negative relative Local Equity exposure may be a surprise since earlier we assumed both were 100% U.S.-oriented. Perhaps these are spurious results? In Exhibit 3, we found that this exposure versus the R1G has been persistent over time, suggesting this may be an intended active bet. 

Exhibit 3: AGTHX Relative Factor Exposure Trend of Local Equity Versus R1G

Source: Venn by Two Sigma. The chart displays factor analysis for AGTHX viewed through the Two Sigma Factor Lens from 3/1/1995-2/21/2023. Relative to benchmark analysis is relative to the Russell 1000 Growth Index. 

In Exhibit 4, we see that recently this difference has been explaining more active risk than usual. In fact, over the most recent 3-year rolling period, the difference in Local Equity exposure explained 27.78% of active risk. This is seeming more curious than spurious.

Exhibit 4: AGTHX Relative Factor Risk Trend of Local Equity Versus R1G

Source: Venn by Two Sigma. The chart displays factor analysis for AGTHX viewed through the Two Sigma Factor Lens from 3/1/1995-2/21/2023

Connecting the Dots with Holdings Data

By using Venn’s new holdings data, we found that indeed this manager is holding 90.77% in equities, with much of the rest in cash (Exhibit 5). Additionally, we see that technology has the largest sector exposure at 19.59%, in line with their growth-focused approach (Exhibit 6). 

Exhibit 5: AGTHX Asset Class Classification

Source: Venn by Two Sigma as of 2/21/2023

Exhibit 6: AGTHX Sector Classification

Source: Venn by Two Sigma as of 2/21/2023. 

Importantly, we found that the Growth Fund of America has 11.64% allocated to non-U.S. stock. Specifically, it has 7.02% exposure to greater Europe, including 2.45% in the Netherlands (Exhibit 7). Uncovering this manager’s willingness to invest internationally provides color as to why AGTHX may have negative Local Equity exposure compared to the R1G.

Exhibit 7: AGTHX Geography Classification

Source: Venn by Two Sigma as of 2/21/2023

In this example, combining returns-based insights with holdings-level context created a more robust narrative to interpret this manager’s performance. This same exercise can be applied with different factors and in a variety of ways, including multi-asset portfolios. 

It is worth noting that returns-based analysis includes the ability to identify that this manager’s negative exposure to Local Equity has been an annualized -0.50% drag on excess return vs the R1G. This suggests that international equity bets relative to the R1G have not paid off.

Exhibit 8: Contribution to Return of Relative Local Equity Exposure, AGTHX vs R1G

Source: Venn by Two Sigma. The table displays factor analysis for AGTHX viewed through the Two Sigma Factor Lens from 3/1/1995-2/21/2023

Empowering Returns-Based Analysis with Holdings Context
Our goal in launching this functionality is to enhance our existing returns-based approach with the ability to see basic holdings data. This adds a new dimension to the Venn platform, which we believe furthers our ability to act as a holistic tool for manager evaluation and multi-asset portfolio analysis.

In this piece, we highlighted how results from returns-based factor analysis can prompt a deeper dive into holdings, and how those holdings may support or increase confidence in returns-based analysis. Stay tuned for more examples of utilizing returns-based analysis side by side with holdings data.

REFERENCES

¹ Venn’s Studio is currently in Beta. Please note that extra fees may apply for Report Lab.

² For this case study, The Growth Fund of America (AGTHX) was selected randomly from a list of U.S.-focused funds with an eye towards those with international exposure.

³ Other factors may also suggest international exposure relative to the Russell 1000 Growth, such as AGTHX’s relative positive exposure to Foreign Currency.

Read the original article here.