In spite of the uncertainty around Covid and the VERY expensive US market 2021 was a great investment year world-wide. Nearly all investment strategies worked - the lowest return was 6.5%.
Normality returned to strategies that work
A BIG change from the past few years was that a lot of the investment strategies that worked very well in the past (over decades in up and down markets) worked well in 2021.
This was especially true in Europe and North America.
Results were ALL over the place
You will see performance was all over the place – meaning it was impossible to say in advance what strategy would have done well based on long-term back tested returns of strategies that work.
What investment strategies worked in 2021?
So, what worked best world-wide in 2021?
Here is a summary:
- Buying companies with high Shareholder Yield (value) companies returned +30.9%
- Buying companies with low price to book (value) +29.6%
- Good FCF Score companies also did well at +26.4%
- Undervalued Value Composite One (VC One) companies also performed well up +25.9%
Before I show you more detailed returns, first information on what and how we calculated the returns.
What strategies we tested – on 10,700 companies worldwide
We looked at the performance of the following 19 investment strategies from 1 January 2021 to 31 December 2021:
- Large vs small companies (Quintile 1 = Biggest companies)
- Book to Market value (inverse of price to book)
- Earnings yield (EBIT/EV)
- Qi Value – 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 over €50 million trading more than €25,000 per day
We excluded companies with a market value less than €50 million and a median 30-day traded value less than €25,000.
This left a universe of around 10,700 companies which means each quintile of the All Developed Markets back test consisted of about 2,140 companies. This large number of companies is good because it makes it unlikely that any one company impacted the return of any quintile.
If the ratio or indicator could not be calculated when the portfolios were formed the company was excluded from the universe ONLY for that specific ratio or indicator.
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
All companies in five groups – Quintile 1 the best
To test the investment strategies, using point in time data (so no look ahead bias), on 1 January 2020 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 worst.
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 Piotroski 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.
Return calculation
Returns for each quintile is calculated as the average percentage change from the stock price over the back test period.
No adjustments were made for currency movements and dividends were included in the return calculation.
The best investment strategy world-wide in 2021
The following table summarises how all 19 investment strategies performed world-wide:
For reference the MSCI World Index gained +20.1%.
Click image to enlarge
Best performing strategies worldwide
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: +21.5%
- Maximum return of Quintile 1 strategies: +30.9%
- Minimum return of Quintile 1 strategies: +6.5%
What worked?
Here are the two best performing Quintile 1 strategies:
- Buying companies with high Shareholder Yield (value) companies returned +30.9%
- Buying companies with low price to book (value) +29.6%
What did not work?
These were the worse Quintile 1 strategies:
- The worse strategy was investing in good 12-month Momentum companies (Price Index 12m) +6.5%.
- Quality companies with the best Gross Margin (Novy-Marx) was the second worst performing strategy and returned +14.6%.
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The best investment strategy in Europe in 2021
Below is the performance of all 19 strategies in Europe:
For reference the European STOXX 600 Index gained +22.2%
Click image to enlarge
Best performing strategies in Europe
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: +25.3%
- Maximum return of Quintile 1 strategies: +31.6%
- Minimum return of Quintile 1 strategies: +14.8%
What worked?
These were the best two Quintile 1 strategies:
- Buying the 20% of companies with low Qi Liquidity (Profits / Yearly trading value) was the best investment strategy in Europe, it gained +31.6%.
- Using the FCF Score (Combines Free cash flow growth with free cash flow stability) would have earned you the second highest return in Europe of +30.4%.
What did not work?
The two worse performing Quintile 1 strategies were:
- If you invested in companies with the best 12 months momentum – Price Index 12m - it would have been the worst strategy you could use but it still returned a respectable +14.8%.
- The second worse strategy was investing in the best Adjusted Slope Average (125d,250d) momentum companies which returned +18.5%.
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The best investment strategy in North America in 2021
Below is the performance of all 19 strategies in North America:
For reference the S&P 500 Index gained +26.9%
Click image to enlarge
Best performing strategies in North America
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: +29.2%
- Maximum return of Quintile 1 strategies: +47.2%
- Minimum return of Quintile 1 strategies: -2.0%
What worked?
The two best performing Quintile 1 strategies were:
- Investing in companies with the lowest Price to book ratio (high Book to Market) was the best strategy returning +47.2%.
- Buying cheap Value Composite One (VC One) companies would have also earned you +47.2%
What did not work?
The two worse performing Quintile 1 strategies were:
- Buying the best 12 months momentum – Price Index 12m - companies would have given you the second lowest return of -2.0%.
- The second worse strategy was investing in the best Adjusted Slope Average (125d,250d) momentum companies which returned +11.6%.
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This was your best investment strategy in Japan in 2021
Below is the performance of all 19 strategies in Japan.
For reference the Japanese Topix 1st Stock Price Index gained +10.9%
Click image to enlarge
Best performing strategies in Japan
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: +11.8%
- Maximum return of Quintile 1 strategies: +21.2%
- Minimum return of Quintile 1 strategies: -2.4%
What worked?
The two best performing Quintile 1 strategies in Japan were:
- The best strategy was buying companies with the highest dividend yield which returned +21.2%.
- Investing in value companies with the highest book to market or lowest price to book ratio also returned +21.2%.
What did not work?
The two worse performing Quintile 1 strategies were:
- Buying companies with the largest 12-month momentum lost 2.4%.
- If you invested in high quality companies with the highest Gross Margin (Novy-Marx) you would have lost 0.1%.
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The best investment strategy in Asia and Oceania Markets in 2021
Australia, New Zealand, Hong Kong, and Singapore companies are included in this analysis.
For reference the iShares Core MSCI Pacific ex-Japan ETF (Australia, New Zealand, Hong Kong, and Singapore companies) returned +4.7%.
Click image to enlarge
Best performing strategies in Asia and Oceania
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: +17.6%
- Maximum return of Quintile 1 strategies: +28.0%
- Minimum return of Quintile 1 strategies: +2.5%
What worked?
The two best performing Quintile 1 strategies were:
- Investing in the best momentum companies as per Adj. Slope (90days) was the best strategy returning +28.0%.
- Investing in companies with the best Value Composite Two ranking (VC Two) was the second-best strategy returning +26.8%.
What did not work?
The two worse performing Quintile 1 strategies were:
- The worse strategy was buying large companies. It would have given you a return of +2.5%.
- If you invested in quality Gross Margin (Novy-Marx) companies, you would have had the second lowest return of +9.5%.
Returns all over the place – This is normal
As you can see no one strategy worked everywhere – sometimes exactly the opposite worked – this just proves that over the short-term anything is possible.
A warning – investment strategy may stop working
Remember just because a strategy did great in 2021 does not mean it will continue to work. As you can see the same strategy performed well in one region and bad in another.
Jumping on the best performing strategy is most likely a bad idea - possibly the worst idea of 2022. Perhaps your best strategy this year is the worst strategy in 2021 as it may turn around as happens a lot to under-performing strategies.
Just like you I have no clue as to what strategy will work best in the future and if someone says he does, he is lying. But if you use a time-tested investment good performing investment strategy, that suits your nature so you can stick with it through thick and thin, you will have great returns over the long term.
If you want to read more about the best strategies we have tested, click here: Best investment strategies Quant Investing
Wishing you profitable investing for 2022
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PPS It is so easy to put things off, why not sign up right now?
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