Back Portfolio Strategy

22V Swaps: Launching a SMID GARP Swap

Published on February 1, 2024

∙ Download the PDF Report

By

Dennis DeBusschere

Brian Herlihy

Kevin Brocks

Sophia Wang

Our favorite theme right now is long SMID GARP and short mega caps. Today we launched a tradeable swap for our formulation of that theme. SMID GARP is MS22GARP Index on bbg. Megas are MS22MEGA Index on bbg. Long SMID GARP and short Megas is MS22LGSM Index.

A quick thematic recap… Mega caps have been driving the market, while SMID caps have lagged. Our Macro Regime Model has classified the current macro regime as a normal/ expansion period. In these periods with lower recession risk, fundamental factors (Value AND Growth) outperform. Simultaneously, Size (mega caps) have traded unusually Defensive; the correlation between Size and Low Vol is atypically high. As the macro picture continues to clear, SMID caps and GARP names should benefit, with mega caps as a source of funds.

Details on the construction of the swap are highlighted below.

LONG SMID GARP SHORT MEGA CAPS (MS22LGSM Index): We optimize the baskets to neutralize industry group and factor exposures, but there will always be some exposures. Long SMID GARP and short Megas is long Banks, REITs, and Energy, and short Staples and Pharma. Tech is split; the basket is overweight Comm Svcs and Tech Hardware but short Semis and Software.

A graph showing a number of people

Description automatically generated with medium confidence

The factor exposures are intentionally net positive Value and Growth and negative Size. Because of the correlation between Size and risk-off factors, the basket is also positively exposed to risk-on (Liquidity, Earnings Turbulence) and negatively exposed to risk-off (Low Vol). The other factor exposures are minimal.

A graph showing the net factor exposure

Description automatically generated

TARGET RETURN: Since the strategy is partly a catchup trade, the PE spread between long SMID GARP and short Megas helps formalize a target return. We are soft targeting the PE spread moving back to its Feb/March 2023 high watermark, when, pre-SVB, disinflation was rapid and hot data was taken as good news. Small caps were recovering relative to Megas. Tail risk was being reduced, right up until tail risk came roaring back via SVB. Net net, similar but conservative for a backdrop. A return to that PE spread implies a l-s short return of +15%.

Constituents of the long side here…

A table of numbers and letters

Description automatically generated

And short side here…

A table with text on it

Description automatically generated

MS22LGSM Index tear sheet.

A screenshot of a computer screen

Description automatically generated
A screenshot of a graph

Description automatically generated

Source: FactSet, 22V Research

DISCLOSURES AND DISCLAIMERS

Analyst Certification

The analyst, 22V Research Group, primarily responsible for the preparation of this research report attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers; and (2) that no part of the research analyst’s compensation was, is, or will be directly related to the specific recommendations or views in this research report.

Analyst Certifications and Independence of Research.

Each of the 22V Research analysts whose names appear on the front page of this report hereby certify that all the views expressed in this Report accurately reflect our personal views about any and all of the subject securities or issuers and that no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views of in this Report.

22V Research (the “Company”) is an independent research provider. The Company is not a member of the FINRA or the SIPC and is not a registered broker dealer or investment adviser. 22V Research has no other regulated or unregulated business activities which conflict with its provision of independent research.

22V Research, LLC is a professional services and independent publication organization. 22V Research, LLC is not a securities broker-dealer, not a member of the Financial Industry Regulatory Authority (FINRA), not a registered investment advisor (RIA) and not a member of SIPC.

Securities transactions, when offered, are offered by 22V Securities, LLC through LPS Capital, LLC. Certain employees of 22V Securities, LLC are dually registered as securities representatives of LPS Capital, LLC or Analyst Hub Securities, LLC. 22V Securities, LPS Capital and Analyst Hub Securities are members FINRA, SIPC.

https://brokercheck.finra.org/

Current Ratings Definition.

SECTOR OUTPERFORM: An “outperform” rating anticipates the company will outperform the S&P Regional Banking Index (peer group).

SECTOR PERFORM: A “market perform” rating anticipates the company will perform in line with the S&P Regional Banking Index (peer group).

SECTOR UNDERPERFORM: An “underperform” rating anticipates the company will underperform the S&P Regional Banking Index (peer group).

Limitation Of Research And Information.

This Report has been prepared for distribution to only qualified institutional or professional clients of 22V Research Group. The contents of this Report represent the views, opinions, and analyses of its authors. The information contained herein does not constitute financial, legal, tax or any other advice. All third-party data presented herein were obtained from publicly available sources which are believed to be reliable; however, the Company makes no warranty, express or implied, concerning the accuracy or completeness of such information. In no event shall the Company be responsible or liable for the correctness of, or update to, any such material or for any damage or lost opportunities resulting from use of this data. Nothing contained in this Report or any distribution by the Company should be construed as any offer to sell, or any solicitation of an offer to buy, any security or investment. Any research or other material received should not be construed as individualized investment advice. Investment decisions should be made as part of an overall portfolio strategy and you should consult with a professional financial advisor, legal and tax advisor prior to making any investment decision. 22V Research Group shall not be liable for any direct or indirect, incidental or consequential loss or damage (including loss of profits, revenue or goodwill) arising from any investment decisions based on information or research obtained from 22V Research Group.

Reproduction And Distribution Strictly Prohibited.

No user of this Report may reproduce, modify, copy, distribute, sell, resell, transmit, transfer, license, assign or publish the Report itself or any information contained therein. Notwithstanding the foregoing, clients with access to working models are permitted to alter or modify the information contained therein, provided that it is solely for such client’s own use. This Report is not intended to be available or distributed for any purpose that would be deemed unlawful or otherwise prohibited by any local, state, national or international laws or regulations or would otherwise subject the Company to registration or regulation of any kind within such jurisdiction.

Copyrights, Trademarks, Intellectual Property.

22V Research Group, and any logos or marks included in this Report are proprietary materials. The use of such terms and logos and marks without the express written consent of 22V Research Group is strictly prohibited. The copyright in the pages or in the screens of the Report, and in the information and material therein, is proprietary material owned by 22V Research Group unless otherwise indicated. The unauthorized use of any material on this Report may violate numerous statutes, regulations and laws, including, but not limited to, copyright, trademark, trade secret or patent laws.