Hidden Figures: Unexpected Manager Exposures

Two Sigma's Venn platform has a very interesting analysis on the hidden exposures of fund managers. They analyzed the factor exposures of funds in four Morningstar catetgories: Large Growth, Large Value, Small Growth and Small Value. 

First up Large Growth Funds, which according to Morningstar: Invest primarily in large US companies that are expected to grow faster than other large-cap companies. Growth describes companies with high earnings and sales growth rates and high valuations. These funds are expected to exhibit negative exposure to Value factors (like low price-to-book) and zero to negative exposure to the Small Cap factor (market capitalization).

The analysis found that average exposure to Venn's Value factor was indeed negative among funds, though some funds in the category did exhibit some positive exposure to the factor. But surprisingly, the average Large fund displayed a fairly positive exposure to Venn's Small Cap factor! (Click on chart to enlarge)

Next to be analyzed were Large Value Funds.  The average positive exposure to Venn's Value facor was as expected. However, once again, the Size exposure was surprising. The majority of Large Growth funds exhibited positive Small Cap exposure.

Moving to Small Cap Growth Funds,  the analysis found that, on average, funds exhibited a negative exposure to Venn's Value factor--as expected (though a surprising number of funds did display positive exposures). There was little suprise in the Size exposure, with the vast majority of funds exhibiting positive exposure to the Small Cap factor.

The last category was Small Cap Value Funds. The results of here were in line with expectations for both Value and Size factors. The average exposures to both factors were positive and no funds exhibited negative exposures to either factor. Well done Small Cap Value managers, you do as you say!

Note: The time period of the analyes was Oct 29, 2016 - Oct 28, 2019