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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
What’s Working, What’s Not
• Key Debate: This is the latest edition of our new product
which focuses on what styles are generating returns for
investors. We address the question on which styles have
been working over the past year and month? We also
evaluate the differences between the 2003-2007 and the
ongoing bull market in terms of winning styles (page 8,9).
We filter stocks that have most “Overweight” or
“Underweight” signals based on styles (page 7)
• What has happened over the past month and 12
months? For long only fund managers, over the past
month, low quality (defined as low free cash flow) and
high beta continue to be big losers whereas high
institutional ownership, momentum and valuations
appear to be in favor. For hedge funds, in the most
recent month, leverage and growth seem to be winning
stock picking strategies. High beta and momentum
continue to be losing money for these investors.
• Over the past 12 months, investors have been rewarding
stocks of companies with low capex, rising institutional
ownership, stocks with inexpensive valuations and
trailing monthly performance. In contrast, high beta and
low quality (low free cash flow) have been losing
strategies. Some of these winning strategies are bit
different from what has worked over the long run (see
adjoining text).
• Our Approach: Our product focuses on assessing what
factors or styles are working and which ones are not. We have
reviewed the performance of 18 most actively used styles and
back-tested their ability to pick stocks (both winners and losers)
in a portfolio context. We calculate factor (investment style)
returns as follows: At the end of each month, we sort the stocks
in our universe on their current exposure to the given style (for
P/E, we sort stocks on P/E as at the end of the month). We
then form a portfolio of stocks using the top and bottom quintile
and calculate the median returns for each basket going 12
months forward. We accumulate these returns for each month
by re-sorting at the end of each month, going back to 1993.
This methodology allows us to test the efficacy of a given style
in picking both good and bad stocks. Our 18 factors include
factors from three categories: Fundamentals (quality, growth
and financial leverage), valuations and market dynamics (like
price momentum, ownership, beta and size).
• Over the long run, not surprisingly, the market focuses on a
combination of high quality, high growth, cheap valuations and
small size. Stocks with these characteristics do well over
market cycles. The factors that do not work well in picking
stocks include high consensus ratings, high institutional
ownership levels and high beta. The market message is mixed
on certain growth and quality metrics such as free cash flows
and ROE delta but it surely likes companies with disciplined
capex. There is surprising bias for past winners in future
winners – implying stocks that have been doing well appear to
be continuing to do well
For Long-only Portfolios: Factor Rankings in the Most Recent Month
Over the long run, long-only portfolio managers should be
picking stocks for their portfolios on the basis of strong growth,
high quality, low valuations, small size (i.e., small and mid-cap)
and high leverage. Price momentum is also a key winning style
– i.e., past winners seem to continue to deliver returns. What
doesn’t work includes the consensus view, institutional
ownership and beta. The market is also not a fan of too much
change in ROE and one-month trailing price momentum. Then
again, low capex is a favored “quality” metric over free cash
flow. The market does not like companies paying too much
dividend – may be signaling that it prefers companies to plough
back cash for growth. The key valuation metric that works over
time is P/B and top line growth is more important than EPS
growth (details on slide 4).
• Some of these factors have not worked over the past 12
months notably revenue growth while the consensus view, and
low capex has assumed more importance. Over the past
month, low quality (defined as low free cash flow) and high beta
continue to be big losers whereas high institutional ownership,
-30% -20% -10% 0% 10% 20% momentum and valuations appear to be in favor.
For Hedged Portfolios: Factor Rankings in the Most Recent Month
• Over the long run, hedge fund portfolio managers need not look
at factors different from what long only managers need to look
at. The difference is what works better when “shorting” stocks.
There it seems a bullish consensus, too much short term
change in ROE, low dividend yield and low free cash flow are
clearly winning styles.
• Indeed, the results over the past 12 months have been a bit
different. Low capex has been in extreme focus to pick winners
while high beta and low free cash flow have lost lots of money.
• Over the most recent month, leverage and growth seem to be
making a come back as stock picking strategies. High beta and
momentum continue to be losing money for investors
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
What’s Working, What’s Not
• Key Debate: This is the latest edition of our new product
which focuses on what styles are generating returns for
investors. We address the question on which styles have
been working over the past year and month? We also
evaluate the differences between the 2003-2007 and the
ongoing bull market in terms of winning styles (page 8,9).
We filter stocks that have most “Overweight” or
“Underweight” signals based on styles (page 7)
• What has happened over the past month and 12
months? For long only fund managers, over the past
month, low quality (defined as low free cash flow) and
high beta continue to be big losers whereas high
institutional ownership, momentum and valuations
appear to be in favor. For hedge funds, in the most
recent month, leverage and growth seem to be winning
stock picking strategies. High beta and momentum
continue to be losing money for these investors.
• Over the past 12 months, investors have been rewarding
stocks of companies with low capex, rising institutional
ownership, stocks with inexpensive valuations and
trailing monthly performance. In contrast, high beta and
low quality (low free cash flow) have been losing
strategies. Some of these winning strategies are bit
different from what has worked over the long run (see
adjoining text).
• Our Approach: Our product focuses on assessing what
factors or styles are working and which ones are not. We have
reviewed the performance of 18 most actively used styles and
back-tested their ability to pick stocks (both winners and losers)
in a portfolio context. We calculate factor (investment style)
returns as follows: At the end of each month, we sort the stocks
in our universe on their current exposure to the given style (for
P/E, we sort stocks on P/E as at the end of the month). We
then form a portfolio of stocks using the top and bottom quintile
and calculate the median returns for each basket going 12
months forward. We accumulate these returns for each month
by re-sorting at the end of each month, going back to 1993.
This methodology allows us to test the efficacy of a given style
in picking both good and bad stocks. Our 18 factors include
factors from three categories: Fundamentals (quality, growth
and financial leverage), valuations and market dynamics (like
price momentum, ownership, beta and size).
• Over the long run, not surprisingly, the market focuses on a
combination of high quality, high growth, cheap valuations and
small size. Stocks with these characteristics do well over
market cycles. The factors that do not work well in picking
stocks include high consensus ratings, high institutional
ownership levels and high beta. The market message is mixed
on certain growth and quality metrics such as free cash flows
and ROE delta but it surely likes companies with disciplined
capex. There is surprising bias for past winners in future
winners – implying stocks that have been doing well appear to
be continuing to do well
For Long-only Portfolios: Factor Rankings in the Most Recent Month
Over the long run, long-only portfolio managers should be
picking stocks for their portfolios on the basis of strong growth,
high quality, low valuations, small size (i.e., small and mid-cap)
and high leverage. Price momentum is also a key winning style
– i.e., past winners seem to continue to deliver returns. What
doesn’t work includes the consensus view, institutional
ownership and beta. The market is also not a fan of too much
change in ROE and one-month trailing price momentum. Then
again, low capex is a favored “quality” metric over free cash
flow. The market does not like companies paying too much
dividend – may be signaling that it prefers companies to plough
back cash for growth. The key valuation metric that works over
time is P/B and top line growth is more important than EPS
growth (details on slide 4).
• Some of these factors have not worked over the past 12
months notably revenue growth while the consensus view, and
low capex has assumed more importance. Over the past
month, low quality (defined as low free cash flow) and high beta
continue to be big losers whereas high institutional ownership,
-30% -20% -10% 0% 10% 20% momentum and valuations appear to be in favor.
For Hedged Portfolios: Factor Rankings in the Most Recent Month
• Over the long run, hedge fund portfolio managers need not look
at factors different from what long only managers need to look
at. The difference is what works better when “shorting” stocks.
There it seems a bullish consensus, too much short term
change in ROE, low dividend yield and low free cash flow are
clearly winning styles.
• Indeed, the results over the past 12 months have been a bit
different. Low capex has been in extreme focus to pick winners
while high beta and low free cash flow have lost lots of money.
• Over the most recent month, leverage and growth seem to be
making a come back as stock picking strategies. High beta and
momentum continue to be losing money for investors
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