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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key MoM takeaway on styles:
• Stocks that are up on a trailing 1M
basis were the worst hit in the past
month. However, on a 12M trailing
basis they continued to be investor
favorites.
• The market also continued to
reward stocks with rising
institutional ownership.
• Stocks of companies with poor
fundamentals and high valuations
bore the front of price fall.
• Over the past 12 months, investors
have been rewarding stocks of
companies with rising institutional
ownership and trailing 12-month
performance. In contrast, high beta,
high leverage, small cap and low
quality (low free cash flow) have
been losing strategies.
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 of which
styles have been working over the past year and
month. We also evaluate the differences between
2003-07 and the ongoing bull market in terms of
winning styles (pages 8-9). We filter stocks that have
the 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, high beta continued to be a big loser,
whereas high institutional ownership and valuations
appear to be in favor. For hedge funds, in the most
recent month, rising institutional ownership and
valuations are in favor as stock-picking strategies. High
beta and low ROE are losing money for investors.
• Over the past 12 months, investors have been
rewarding stocks of companies with rising institutional
ownership and trailing 12-month performance. In
contrast, high beta, high leverage, small cap 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 which
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
quintiles 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 certainly likes companies with disciplined
capex. There is a surprising bias for past winners in future
winners – implying that stocks that have done well appear to be
continuing to do well.
For Long-only Portfolios: Factor Rankings in the Most Recent Month
Source: FactSet, Company Data, Morgan Stanley Research
• 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 – maybe signaling that it prefers companies 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, small cap high debt-equity and low free cash flow are
big losers whereas high institutional ownership and momentum
appear to be in favor
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key MoM takeaway on styles:
• Stocks that are up on a trailing 1M
basis were the worst hit in the past
month. However, on a 12M trailing
basis they continued to be investor
favorites.
• The market also continued to
reward stocks with rising
institutional ownership.
• Stocks of companies with poor
fundamentals and high valuations
bore the front of price fall.
• Over the past 12 months, investors
have been rewarding stocks of
companies with rising institutional
ownership and trailing 12-month
performance. In contrast, high beta,
high leverage, small cap and low
quality (low free cash flow) have
been losing strategies.
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 of which
styles have been working over the past year and
month. We also evaluate the differences between
2003-07 and the ongoing bull market in terms of
winning styles (pages 8-9). We filter stocks that have
the 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, high beta continued to be a big loser,
whereas high institutional ownership and valuations
appear to be in favor. For hedge funds, in the most
recent month, rising institutional ownership and
valuations are in favor as stock-picking strategies. High
beta and low ROE are losing money for investors.
• Over the past 12 months, investors have been
rewarding stocks of companies with rising institutional
ownership and trailing 12-month performance. In
contrast, high beta, high leverage, small cap 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 which
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
quintiles 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 certainly likes companies with disciplined
capex. There is a surprising bias for past winners in future
winners – implying that stocks that have done well appear to be
continuing to do well.
For Long-only Portfolios: Factor Rankings in the Most Recent Month
Source: FactSet, Company Data, Morgan Stanley Research
• 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 – maybe signaling that it prefers companies 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, small cap high debt-equity and low free cash flow are
big losers whereas high institutional ownership and momentum
appear to be in favor
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