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Conviction Index Outperforms During Market Volatility

Markets are experiencing the biggest drop we've seen in two years. The Novus Conviction Index alone is keeping its head above water YTD.

Raheem Shahid
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The week of February 5, 2018 was a rough one for the markets: CBOE Volatility index peaked at 49 Tuesday morning and remained above normal since, currently moving around 25–30.

All major indexes are down Month to date (MTD)—some sophisticated investors are calling this a market correction, whereas others believe it’s the beginning of increasing turbulence. In all the current uncertainty, one area of interest is the Novus Conviction Index’s outperformance through the recent volatility. We discussed the index’s outperformance in 2017, but what’s happened through last week?

The Conviction index—which was up 306 bps YTD (through close of business February 9, 2018)—hasn’t only outperformed the S&P 500 but also its cousin indices, the Novus 4C. As displayed in the table below, the Novus Conviction was the only index that stayed positive through the volatility.

Conviction Outperforms During Volatility

This is mainly due to the security selection alpha. Of the total 306 bps generated, 342 bps alone were through the security alpha. The security value reflects the return of the underlying securities due to price changes in excess of market return and its associated sector level indexes.

Conviction outperforms through vol 2

Looking further into the mechanics of this index in the graphs below, we see that hedge fund managers have the biggest allocations in Information Technology and Consumer Discretionary, followed by Financials and Industrials.

Conviction strong during vol 3

Alpha was produced in all four sectors, with Consumer Discretionary (214 bps) leading the pack.

Conviction Outperforms During Volatility 4.png

Netflix, Amazon, Mastercard, Transdigm, and Bank of America were the top five alpha contributors on an individual name basis.

Conviction Outperforms During Volatility 5

By its very nature, conviction names are the securities chosen by hedge fund managers with careful vetting, robust research, and appropriate sizing. Managers tend not to exit out of these names in response to short-term volatility like we’re seeing in the market currently. Therefore managers maintain their positions knowing they’re invested in the long-term. This stability in names explains the YTD outperformance relative to the market and the other Novus 4Cs. We’ll continue monitoring these trends and other trends throughout the volatility.

All Novus clients can evaluate the Novus 4C Indices on the Novus Alpha platform.

Investors who would like to participate in these themes via investable products can contact Barclays. Check our website for an explanation of how Novus data is used to build these indices.

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