Q1 2024 Active Management Review: Momentum and Growth Factors Outperform

Executive summary:

The first quarter was a more favorable environment for active managers in U.S. Large Cap, U.S. Small Cap, Emerging Markets, the UK, Europe, Australia, Canada, Long/Short and Global Real Estate, while being more challenging for Global, Global ex-U.S., Japan and Listed Infrastructure managers.
The Momentum factor was the standout performer across all regions, with the Growth factor also outperforming.
Bolstered by AI, the information technology sector outperformed most markets during the quarter, with energy and financials also performing relatively well. Meanwhile, the real estate, utilities, consumer staples and materials sectors underperformed across most markets.

Another strong quarter in markets led to another stellar performance for the Momentum and Growth factors.

The first quarter of 2024 picked up where the final quarter of 2023 left off, with most markets finishing in positive absolute territory as inflation continued to moderate, suggesting that a more favorable environment for growth could unfold later this year if central banks begin trimming interest rates. This narrative helped drive outperformance in the Momentum and Growth factors, with Momentum the standout performer across all regions. Other than in the U.S., Value also outperformed, but to a lower extent.

In this risk-on environment, Low Volatility was the worst performing factor, with Quality also lagging across most regions. In addition, Small Caps fared worse than Large Caps during the quarter.

The U.S. market, which generated double digit returns, fared particularly strong in the first quarter, but Japan was the stand-out performer as it continued to benefit from the prospect of seeing healthier levels of inflation, which allowed it to move away from seven years of negative interest rates. Japan also benefited from the value-up theme spearheaded by the Tokyo Stock Exchange, which is pushing for better corporate governance.

Given the strength of the U.S. dollar during this period, returns in local currencies were even stronger. China was again the largest market to generate negative returns, but there appears to be some initial signs that the market is starting to bottom.

On balance, the first quarter was a more favorable environment for active managers in U.S. Large Cap, U.S. Small Cap, Emerging Markets, the UK, Europe, Australia, Canada, Long/Short and Global Real Estate, while being more challenging for Global, Global ex-U.S., Japan and Listed Infrastructure managers. Meanwhile, country and sector dispersion remained wide, impacting managers’ relative returns alongside stock selection.

The information technology sector continued its strong run on the back of the AI (artificial intelligence) theme, outperforming across most markets. The energy and financials sectors also did relatively well, while the real estate, utilities, consumer staples and materials sectors underperformed across most markets.

At Russell Investments, our unique relationship with underlying managers affords us special access into the latest active management insights. Here are the key takeaways in first-quarter active management performance from our manager research team.

Global equities

The first quarter was a challenging environment for active Global and International equity managers, with around 35% and 45% of products outperforming their respective benchmarks.

Momentum was the standout performing factor while Growth and Quality were also positive. Value struggled amid expectations of U.S. Federal Reserve (Fed) rate cuts and receding risks of a recession. Lower beta factors, High Dividend Yield and Minimum Volatility also lagged.
Tech and communications services remained strong, particularly in the U.S. due to the dominance of the Magnificent Seven stocks. Meanwhile, real estate lagged.
Japan was the best performing country globally despite a weak yen. The Bank of Japan’s (BoJ) policy shift to end to its negative interest rate policy presented a tailwind for market sentiment. Meanwhile, China remained weak.

U.S. equities

The first quarter was a favorable environment for active U.S. Large Cap and U.S. Small Cap managers, with around 55% and 65% of products outperforming their respective benchmarks.

Momentum and Growth strongly outperformed in the quarter, while Value, Low Volatility, and smaller stocks lagged as the market was again powered by mega cap AI-driven tech stocks.
Technology, energy, and financials were the largest outperformers, while real estate and defensive sectors like utilities, telecom, and consumer staples lagged the market.
The largest stocks in the S&P 500 Index, particularly higher-growth names, led the outperformance, while smaller caps—particularly more value-oriented names—underperformed in the quarter.

Emerging markets equities

The first quarter was a favorable environment for active Emerging Markets (EM) managers, with around 65% of products outperforming the EM index.

It was a tale of two halves, with benchmark returns positive, but modest after a poor January.
Rotation into growth-oriented and large cap stocks benefited those factors, with Momentum the best performer. Small caps and Value lagged.
IT was again the best performing sector, continuing to benefit from the AI theme, with Energy was also positive. Staples, materials, healthcare and real estate all underperformed.
Brazil and China underperformed while Turkey and Taiwan were the best performing countries.

UK and European equities

The first quarter was a moderately favorable environment for active European equity and UK equity managers, with about 50% outperforming their respective benchmarks.

Inventory normalization and a modest pickup in industrial activity benefited IT (semi-conductors) and the auto industry. Concurrently, changes in interest expectations (higher for longer) benefited banks and insurers.
Continental Europe outperformed the UK, benefitting from its greater exposure to IT and lower exposure to consumer staples.

Japan equities

The first quarter was a challenging environment for active Japanese equity managers, with only around 40% of products outperforming the TOPIX Index.

Value and Momentum strongly outperformed, while Small Caps, Quality, and Low Volatility lagged.
Financials and energy were the best performing sectors, while consumer staples and healthcare underperformed.
The market's expectation of a soft landing for the U.S. economy led to a risk-on market, positively impacting Momentum stocks, which in Japan comprise large-cap value stocks poised to benefit from corporate governance reforms and the inflationary landscape.

Australian equities

The first quarter was a favorable environment for active Australian equity managers, with around 75% of products outperforming the ASX 300 index.

There was a wide dispersion of manager returns, driven by stock selection, rather than style.
Sectors that managers are often underweight—REITs (real estate investment trusts) and financials—outperformed. This was in part due to market expectations of earlier interest rate cuts. Banks, which make up about 20% of the index, generated strong returns.
Materials, metals and mining, which represent about 23% of the benchmark, were meaningfully down due to falling commodity prices. Active positions in these companies were a significant driver of manager returns.

Canadian equities

The first quarter was a moderately favorable environment for active Canadian Large Cap equity managers, with around 50% of products outperforming the S&P/TSX Index.

Momentum, Quality, and Growth strongly outperformed the S&P/TSX Index. Value was slightly ahead while Low Volatility lagged.
Healthcare, while a small segment of the market, was the best-performing sector. Energy and industrials also outperformed significantly. Meanwhile, utilities and communications services were the worst.
The equity market became less concerned with the likelihood of a recessionary scenario, giving an advantage to cyclical stocks.

Long/Short equity

The first quarter was a favorable environment for equity Long/Short strategies, with the HFRI Equity Hedge Index advancing about 5.2%, although it didn't quite match the global equity index surge.

The HFRI Equity Market Neutral Index lagged further behind.
The resilience of U.S. equities was partly due to tech innovation and consumer spending, in spite of high interest rates and economic uncertainties.
European equities rallied on relative value and improved earnings.

Real estate and infrastructure

The first quarter was a favorable environment for active Global Listed Real Estate managers, while being more challenging for Global Infrastructure, with around 75% and 20% of products outperforming their respective benchmarks.

In real estate, non-benchmark bets (mainly stocks with data center exposure) helped boost excess returns over the benchmark. AI continued to drive demand for data centers.
In infrastructure, Constellation Energy (which has an approximately 1.9% benchmark weight) posted a roughly 58% return, driven by ownership of 15 nuclear power plants. Reliable energy is a key need for data centers to meet AI customer demand Constellation is not widely owned by infrastructure managers, thereby negatively impacting managers’ benchmark relative returns.

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