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Chart of the Week: Just Companies See Shallower Drawdowns in Market Downturn

As our economy sees increasing uncertainty and volatility after the market recovery in Q2, this week’s analysis dives into our 2020 Rankings to evaluate median maximum drawdowns by quintile. 

Maximum drawdown is defined as the percentage peak-to-trough performance over a period of time. Maximum drawdown is a critical tool for investors to understand risk, as it illuminates the impacts of downside scenarios. The deeper the loss, the steeper the recovery needs to be to get back to even. Other risk metrics such as standard deviation of returns are more likely to disguise periods of poor performance. 

Splitting the Russell 1000 companies we rank into five quintiles (with top performers in Q1 and bottom performers in Q5) we look at the median maximum drawdown by quintile. We see that top-ranked, Q1 companies in Q1 had a median max drawdown of -42.9% relative to the -48.2% from the bottom-ranked Q5 companies.

The picture looks similar for our JULCD index, that includes the top 50% performers from each industry: Securities included in the index saw median maximum drawdowns that were 3.2% lower than those of securities not included in the index. 

As investors continue to pull their assets from U.S. Equity funds and into taxable bond strategies, the uncertainty and unique crisis we are in has investors turning more risk-averse. Even veteran, bubble-predicting investors like Jeremy Grantham have said the COVID-19 crisis “should have generated enhanced respect for risk and it hasn’t, it has caused quite the reverse,”  noting he has never seen a period where the outlook is so uncertain. 

This uncertainty, coupled with the highest levels of volatility we have seen in decades, has investors in search of resilient, high-quality companies that focus on long-term performance. It is easy to see why ESG funds in the U.S. are on pace in 2020 to double the record $20.6B total inflows in 2019. 

As we have highlighted in past Charts of the Week at JUST Capital, the top quintile of America’s Most JUST companies not only outperformed the bottom quintile by 465bps in Q1 but bounced back quicker, outperforming the bottom quintile by 876bps through Q2 2020. The top quintile of JUST companies that prioritize their stakeholders see continued outperformance, recovery, and shallower drawdowns. As investors seek equity market exposure with a heightened degree of stability, the most JUST companies prioritizing their workers, customers, communities, environment, and shareholders continue to prove ESG investing can produce market outperformance. 

If you are interested in supporting our mission, we are happy to discuss data needs, index licensing, and other ways we can partner. Please reach out to our Director of Business Development, Charlie Mahoney, at cmahoney@justcapital.com to discuss how we can create a more JUST economy together.

If you have questions concerning the underlying analysis, please reach out to our Senior Manager for Quantitative Research, Steffen Bixby, PhD, at sbixby@justcapital.com.

Have questions about our research and rankings?  We want to hear from you!