If you look at the first half 2018 returns of the 19 investment strategies we tracked you can only come to one conclusion - the markets are messed up!
What has worked in the past (over decades in up and down markets) just did not work in the first half of the year.
In fact exactly the opposite worked.
Expensive, bad performing, junk, small companies did well
For example, if you bought expensive companies by:
- Dividend yield +15.3%
- Value Composite One +15.6%
- Value Composite Two +15.1%
- Earnings Yield +13.1%
- ERP5 +14.4%
- Book to market +13.3% - the only strategy that performed like it should
You would have done great with an average return of around 15% in six months.
Undervalued good quality companies did badly
If you bought undervalued companies your average return would have been close to 1.3%.
If that is not messed up tell me what is!
So what investment strategy worked in the first half of 2018?
So what worked best world-wide in the first half of 2018?
Here is a short summary:
- Undervalued FCF Score (Free cash flow growth with free cash flow stability) +16.1%
- Overvalued Value Composite 1 companies worked VERY well +15.6%
- Low dividend yield companies did great +15.3%
- Overvalued Value Composite 2 companies also worked +15.1%
- Expensive Shareholder Yield companies did well +15.3%
As you can see these returns are all over the place and do not make a lot of sense. For example, would you have thought that buying companies with the lowest dividend yield would have given you one of the best returns?
Before I show you the exact strategies and their returns first some information on what and how we calculated the returns.
What strategies we tested – on 7,000 companies worldwide
We looked at the performance of the following 19 investment strategies over the 6 month period from 1 January 2018 to 30 June 2018:
- Large vs small companies
- Book to Market value (inverse of price to book)
- Earnings yield (EBIT / EV)
- Qi Value ranking – the strategy I use in my own portfolio
- Price Index 6m (Current price / Price 6 months ago) also known as 6 months Momentum
- Price Index 12m (Current price / Price 12 months ago) also known as 12 months momentum
- VC One also known as Value Composite One rank
- VC Two known as Value Composite Two rank (Value Composite One with an additional ratio: Shareholder Yield)
- ERP5 ranking (Ranking based on Price to Book, Earnings Yield, Return on invested capital (ROIC), 5 year average ROIC)
- Shareholders Yield (Dividend yield + Percentage of Shares Repurchased)
- Dividend Yield
- Dividend growth 5 years (The geometric average dividend per share growth rate over the past 5 years)
- MF Rank (Magic Formula Ranking developed by Joel Greenblatt)
- Piotroski F-Score
- Qi Liquidity ranking (Adjusted Profits / Yearly trading value)
- Gross Margin Novy Marx (gross profits / total assets) – the best quality ratio we have tested
- Free Cash Flow (FCF) Score (Calculated by combining Free cash flow growth with free cash flow stability)
- Adjusted slope average (125 day, 250 day) – momentum
- Adjusted slope (90 days) – momentum
Only companies worth more than $50 million
We excluded companies with a market value less than $50 million, to make sure that we only look at companies you can buy and sell easily.
Markets worldwide then regions
The following stock markets (and regions) were included:
North American Markets
- USA
- Canada
European Markets
- All the Eurozone countries
- United Kingdom
- Switzerland
- Norway
- Denmark
- Sweden
Japanese Market
- Only Japan
Other Asian and Oceanic Markets
- Australia
- New Zealand
- Hong Kong
- Singapore
This gave us a list of about 7,000 companies.
All companies in five groups – Quintile 1 the best
For each of the strategies using point in time data (no look ahead bias) on 1 January 2018 we divided all the companies in the universe into five 20% groups or quintiles.
Quintile 1 shows the companies that scored best in for all the strategies we tested - Quintile 5 the worse.
For example, Quintile 1 shows the return of the 20% of companies with the highest book to market ratio (lowest price to book – cheap companies) at the start of the year. And Quintile 5 shows the return of companies with the lowest book to market ratio (highest price to book ratio – expensive companies).
For Price Index 6m quintile 1 show companies with the best momentum (biggest share price increase over 6 months) and quintile 5 companies with the biggest price fall in the previous 6 months.
For the F Score quintile 1 shows the return of companies with the best Piotroski F-Score (9 or 8) and quintile 5 those with the worse F-Score.
For the size strategy quintile 1 shows the return of the 20% of companies with the biggest market value and quintile 5 the 20% smallest companies.
What worked world-wide?
The following table summarises how all 19 investment strategies performed world-wide:
Apart from book to market no strategy performed like you would expect it should.
Click image to enlarge
Best performing strategies worldwide
Source: www.quant-investing.com
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: +1.3%
- Maximum return of Quintile 1 strategies: +13.3%
- Minimum return of Quintile 1 strategies: -2.2%
What worked?
Here are the two best performing strategies:
- Undervalued FCF Score companies (but not the cheapest) +16.1% (looks like an outlier)
- Expensive Value composite 1 companies +15.6%
What did not work?
These were the worse strategies:
- Cheap Value Composite 2 companies -2.2%
- Cheap Value Composite 1 companies -2.0%
Get this report on a daily basis as well as the tools to implement all 19 strategies (you can pay more for an inexpensive lunch for two) in your portfolio sign up here.
What worked in Europe?
Below is the performance of all 19 strategies in Europe:
Click image to enlarge
Best performing strategies in Europe
Source: www.quant-investing.com
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: +1.8%
- Maximum return of Quintile 1 strategies: +4.0%
- Minimum return of Quintile 1 strategies: -0.8%
What worked?
These were the best two strategies:
- High momentum companies selected using Price Index 6 months (but not the best 20%) +5.3%
- Neither cheap or expensive ERP5 companies +5.1%
What did not work?
The two worse performing strategies were:
- Bad momentum companies with a bad Adjusted Slope 125d/250d value: -4.7%
- Bad momentum companies selected using Price Index 6 months -3.4%
Get this report on a daily basis as well as the tools to implement all 19 strategies (you can pay more for an inexpensive lunch for two) in your portfolio sign up here.
What worked in North America?
Below is the performance of all 19 strategies in North America:
As you can see apart from book to market +38.3% no investment strategy performed like you would expect!
Late bull market madness perhaps?
Click image to enlarge
Best performing strategies in North America
Source: www.quant-investing.com
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: +6.1%
- Maximum return of Quintile 1 strategies: +38.3%
- Minimum return of Quintile 1 strategies: +0.9%
What worked?
The two best performing strategies were:
- Low Dividend Yield companies: +42.5%
- Expensive (but not the most) Value Composite 2 companies: +42.2%
What did not work?
The two worse performing strategies were:
- Bad momentum companies (not the worse they had a great performance) selected using Adjusted Slope 125d/250d: 0.0%
- Expensive companies selected using Shareholder: +0.5%
This was your best strategy in Japan
Below is the performance of all 19 strategies in Japan:
Apart from ERP5 and Gross Margin (Novy-Marx) the other strategies did not perform as you think they should.
Click image to enlarge
Best performing strategies in Japan
Source: www.quant-investing.com
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: -2.9%
- Maximum return of Quintile 1 strategies: +3.9%
- Minimum return of Quintile 1 strategies: -6.7%
What worked?
The two best performing strategies were:
- Good quality companies selected using Gross Margin (Novy-Marx): +3.9%
- Bad FCF Score companies: +3.0%
What did not work?
The two worse performing strategies were:
- Bad quality companies (but not the worse) selected using Gross Margin (Novy-Marx): -7.2%
- Good momentum companies selected using Adjusted Slope 125d/250d: -6.7%
Get this report on a daily basis as well as the tools to implement all 19 strategies (you can pay more for an inexpensive lunch for two) in your portfolio sign up here.
What worked in Asia and Oceania Markets?
(Australia, New Zealand, Hong Kong and Singapore companies are included in this analysis)
Here the performance of most strategies looks more normal.
Click image to enlarge
Best performing strategies in Asia and Oceania
Source: www.quant-investing.com
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: +0.3%
- Maximum return of Quintile 1 strategies: +3.1%
- Minimum return of Quintile 1 strategies: -4.7%
What worked?
The two best performing strategies were:
- Good momentum companies (but not the best) selected using 12 months Price Index: +3.2%
- Good quality companies selected using Gross Margin (Novy-Marx): +3.1%
What did not work?
The two worse performing strategies were:
- Bad momentum companies selected using Adjusted Slope 90d: -12.3%
- Bad momentum companies selected using Price Index 6 months -12.1%
Returns all over the place – is normal
As you can see no one strategy worked everywhere – sometimes exactly the opposite worked – this just proves that over six months anything is possible in the markets.
A quick warning – it may stop working
Please remember just because a strategy did well so far in 2018 does not mean it will continue to do so. As you can see the exact same strategy was the best in one region and also the worse in another region.
Jumping on the best performing strategy is most likely a bad idea - possibly a very bad idea.
In fact your best strategy may be the worst performing strategy as it may turn around – this is not a recommendation.
Like you I also have no clue as to what strategy will work in the future - if someone says he does, he is lying.
If you want to get more information on all the best strategies we have tested click here: Best investment strategies Quant Investing
Your performance tracking analyst
Wishing you profitable investing
Tim du Toit
PS To get this report on a daily basis as well as the tools to implement all 19 strategies in your portfolio sign up here.
PPS It’s so easy to put things off, why not sign up right now?
