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Everyone Gets a Re-Rating (Just Kidding)

We wrote in our July 2020 Newsletter about the disparity between the performance of certain “growth” and “stay at home” stocks relative to the rest of the market. We were puzzled at the way the market was handling the valuations of the companies that were either not hurt by the pandemic, or even had a commercial benefit from the temporary world order. Conditions have changed significantly since last August, and we thought it was timely to revisit the analysis.

The precursor to the analysis was that July 2020 was a brutal performance month for Ballina strategies. Since that time, there was a very meaningful turning point for the world, one that reverberated very profoundly across asset markets. I’m referring to November 9th, 2020, the date when Pfizer and BioNTech announced the results of their clinical trials. Value managers know this date all too well because, as compared to the environment that existed in July of 2020, we all suddenly began to look a little bit smarter. Was this due to a reversion of market treatment for the favored Pandemic companies? To refresh your memory, this is what things looked like in our analysis among S&P 500 companies (see below). Top growth companies outperformed, but also re-rated versus history. The struggling companies actually de-rated versus history, which was surprising.

How things appeared in the July 2020 Newsletter

Updating for the last six months (as of 6/10/21, see below), a few things strike us: 1) there are fewer disparities. The Best performing and worst performing segments are less than 1000 bps from the median in the S&P 500. 2) The “Struggling a Bit” group had the best performance in the last six months, returning 28.3%. This makes sense given the recovery trade sentiment we’ve had in the past six months. 3) The re-rating that has occurred since last year has more of a broad base. The top Growth companies have expanded their substantial re-rating by just a bit, while the “Slight Decliners” and “Struggling a bit” group have expanded relative valuation (versus July 2020). For the “Struggling a Bit”, this brings the median in their group up to parity with history, so hardly something to crow about.

This time around, we ran the same analysis on International Developed markets. See below. We don’t have July 2020 for comparison, but a few things to note: 1) the returns per sub segment are even tighter than in the U.S. The best and worst performing segments are no more than 500 bps from the median, 2) There has been a clear overall re-rating for the entire group versus history that is almost as substantial as in the U.S. (11.6% versus 12.1%), and 3) for some reason the “Slight Decliners” have no re-rating at all. This makes it seem like International investors are perhaps using a barbell strategy, pivoting between “recovery” and “growth”, but neglecting companies that don’t fit these themes.

From the date of the Pfizer announcement through June 10th, 2021 (the date of our updated analysis), the Russell 2000 Value Index returned 48.9% on a total return basis. And this is actually the greatest takeaway regarding the global equity environment since the Pfizer announcement - Smaller has been better. The S&P 500, for example, returned 20.5% over this same time period. This is a strong return, but the S&P Global Small Cap Index returned 30.7%. Sure, value returned a bit better. But it’s the small companies, the Danny Devito’s of your portfolio if you will, that have really shined. We at Ballina love the undervalued companies that we find down the market cap scale, so this has been a very rewarding period for us.

We’re doing our best to stick to our knitting at this point. The most important returns are the ones that are in front of us. Everyone is traveling through the fog at the moment. We would approach anyone with skepticism that claims clairvoyance on a current market outlook. This includes anyone that claims that value will outperform. We’re attempting to keep as many winners as we can, hoping that this discipline helps us to avoid selling winners for immediate detractors.

Strategy Performance

International All-Cap Value returned -1.67% (gross basis) in June 2021 versus -0.34% for the benchmark. Year to date performance was 20.24% (gross) versus 10.3% for the benchmark.

Global Small Cap Value returned -1.43% (gross) in June 2021 versus 0.86% for the benchmark.[1] Year to date performance was 13.95% versus 14.96% for the benchmark.

Top Contributors and Detractors

International All-Cap Value’s top contributor in June was Mazda Motor. The Japanese auto stock returned 10.1% as investors reacted positively to production and sales updates that demonstrated that the company is performing better than expected in most of it’s major markets. The strategy’s top detractor in June was Vistry Group Plc, which declined 13.6%. The stock reached a post COVID high at the end of May, and investors took profits. The company continues to have an upbeat tone.

Global Small Cap Value’s top contributor in June was Alliance Resource Partners LP. The stock returned 21% in June, as the U.S. producer with coal and oil and gas interests has continued to raise guidance. The top detractor in the strategy for June was EZCorp Inc. The U.S. pawn services provider declined 18% as investors took profits. The stock had reached a two year high in May, and investors may feel that the North American recovery may be slowing down.

[1] Benchmark for Global Small Cap Value comprised of 50% weight iShares Russell 2000 Index (IWM) and 50% weight Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)

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