Size & Style Responsive Strategy - May 2025 Recap

May 2025 SSR Strategy Performance Update

In May, our Size & Style Responsive (SSR) Strategy model underperformed both the Russell 3000 and our size and style benchmark. 

Composite Performance Attribution

The 3.7% Strategy Return represents actual client returns for the month utilizing this strategy.

The underperformance was driven primarily by three factors:

• Size and Style Decisions (-0.3%): May was largely Size-neutral, with only a slight edge for large-cap stocks over small-cap stocks, primarily driven by the strong performance of large-cap growth. Our slight tilt towards small- and mid-cap (SMID) stocks did contribute modestly to the underperformance. The impact was minor, reflecting the combination of a balanced market environment in terms of size and the modest magnitude of our SMID tilt. Short-term technical indicators continue to favor large-cap and growth stocks, a trend we are closely monitoring to inform future adjustments.

• Stock Selection (-1.9%): A stark reversal from the strong stock selection performance we experienced in previous months (March and April). The May underperformance in stock selection was largely due to a significant "recovery" or "junk" rally. This phenomenon is illustrated by the notable contraction in credit spreads and normalization of the VIX, indicating a rapid decline in risk premiums.

  • When risk premiums are elevated and then contract sharply, higher-risk stocks typically outperform as they essentially harvest the contraction of this risk premium into returns. Our stock selection model tends to excel during stable or declining market conditions, as seen earlier this year. However, it faces challenges during sharp recovery rallies. While we maintain a specific signal for navigating recoveries, the recent market moves did not trigger our thresholds to activate this signal. Moreover, we do not anticipate that this "junk" rally will persist, given credit spreads and VIX have returned to historically stable levels typical before recent volatility spikes.
    
    

• Other (-0.4%): This underperformance is attributed to trading frictions, including timing of execution, market drift from when model trades are determined to actual implementation, and other operational nuances involved in executing trades.
  

We did not make any size or style adjustments during May. We continue to monitor both short-term technical indicators and long-term cyclical charts, along with macroeconomic factors, to inform our strategic decisions moving forward.

Compliance Disclosure:
Past performance, whether actual or hypothetical, does not guarantee future performance. Investment results and principal value will fluctuate, and clients' investments, when redeemed, may be worth more or less than their original cost. This communication is intended solely for financial professionals and advisors and is not meant for use with clients or the general investing public.