Quantitative Insights

Vol. 1, No. 02— July, 2009

Sharp u-turn from momentum to value

A lthough we anticipated the beginning of a new value regime as the economy troughed, the
ferocity of the shift away from momentum in the second quarter surprised us. We did not
expect it would happen this quickly.

E xhibit 1 shows our

research into investment
style performance and the
Exhibit 1: Momentum / Value Rotation Accelerates Sharply
1.0%
Momentum relative to Value: 48-month moving average
four-year rotation between 0.8%
momentum and value Momentum outperforms
strategies. 0.6%

0.4%
A momentum-driven market
has historically preceded a 0.2%

recession, and worked well 0.0%

through it too. Once a -0.2%

recession nears its end, the
market typically switches its -0.4% Value outperforms
focus to valuations and risk -0.6%

taking. This has happened in 87 91 93 97 00 04 08 09

every one of the past five
recessions going back 40
years.
In the first quarter of 2009
we observed that momentum
had started to give way to
value. However, the speed
at which value roared back
surprised us. A powerful
deep value (Book/Price)
rally, coupled with risk-taking
(leverage and volatility) ,
drove market performance in
the second quarter.
Source: Genus Institutional Equity
Exhibit 2: Stock Selection Factor Performance — Canada
2nd Quarter 2009 March 2008—March 2009
B o o k/P rice
EB ITDA /Enterprise Value
Cash Flo w/Enterprise Value
Dividend Yield
P rice/Earnings
Interest Co verage
Return o n Equity
2-Year EB ITDA Gro wth
Size
Share Repurchase

E xhibit 2 shows the Earnings Surprise

outperformance of Lo w Vo latility
value factors in the second Lo w Leverage
quarter (red bars) and the Quarterly Dividends
sharp reversal in factor Quarterly Cash Flo w
performance versus the 12 A nalyst A greement
months from March 2008 to A nalyst Estimate Revisio n
March 2009 (blue bars). On 6-M o nth P rice M o mentum
the flip side, momentum was 11-M o nth P rice M o mentum Source: Genus Institutional Equity
crushed in the second
-40% -30% -20% -10% 0% 10% 20% 30% 40%
quarter, down almost 40%.

Quantitative Insights 1
 Quantitative Insights

E xhibit 3 shows the performance

of our Bear Market Recovery
(BMR) Index for the 12 months ended
Exhibit 3: High Risk Stocks Score Big Short-Term Gains

Genus Bear Market Recovery Index 6/30/08-7/20/09

June 30, 2009.
-210
The BMR Index is an equal-weighted
composite of four attributes that -220
include high risk, low quality, low +50%
momentum and deep valuation. -230

Riskier stocks scored big gains in the -240

past six months while higher quality
stocks, those with the least risky -250
attributes, have lagged.
-260
While risk attributes can provide
sizeable rewards in economic -270
recoveries they underperform in the
middle of the economic cycle and do -280
not produce excess returns over a Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09

complete market cycle. Source: Genus Institutional Equity

E xhibit 4 shows that over the longer term the opportunity for high risk stocks is limited. Although
there are periods when the BMR Index outperforms, typically into a recovery (93/94, 98/99, 02/03
and 08/09 ) over the longer term these attributes do not add value. Their point of maximum risk/reward
is when the market is coming off its worst (See insert: Exhibit 3). Their performance will likely continue to
wane in the next few quarters as investors gain confidence in fundamentals and start focusing on high
quality stocks, earnings-driven valuations and positive long-term price momentum—attributes that
typically provide superior returns over an entire market cycle.

Exhibit 4: Bear Market Recovery Index Cumulative Returns

BMR Index: Equal-weighted composite of four attributes that include

50
high risk, low quality, low momentum and extreme valuation.
0

-50
The performance of risky stocks in
the past six months has been well
-100
above their historical relative norm.

-150

Exhibit 3
-200

-250

-300
Dec.92
Jun 93
Dec 93
Jun 94
Dec 94
Jun 95
Dec 95
Jun 96
Dec 96
Jun 97
Dec 97
Jun 98
Dec 98
Jun 99
Dec 99
Jun 00
Dec 00
Jun 01
Dec 01
Jun 02
Dec 02
Jun 03
Dec 03
Jun 04
Dec 04
Jun 05
Dec 05
Jun 06
Dec 06
Jun 07
Dec 07
Jun 08
Dec 08
Jun 09

Source: Genus Institutional Equity

Quantitative Insights is published quarterly by Genus Institutional Equity, a division of Genus Capital Management
6th Floor~900 West Hastings St., Vancouver, BC, Canada V6C 1E5 T 604 683 4554 www.genuscap.com