If you look at the 2019 returns of the 19 investment strategies we track you can only come to one conclusion - the markets are messed up! The returns in 2018 were just as messed up !
With messed up I mean if you look at the performance of nearly all strategies world-wide you will see what has worked in the past (over decades in up and down markets) just did not work in 2019, the same as 2018.
Even though most strategies showed healthy gains in a lot of cases if you invested in undervalued companies your returns would have been lower than if you bought already expensive bad quality companies.
What investment strategies worked in 2019?
So what worked best world-wide in 2019?
Here is a short summary:
- Buying companies with the highest price to book value (overvalued) would have given you the best return of +32.8%
- Bad Value Composite One companies (with the worst – most overvalued Value Composite One ranking) performed well up 31.6%
- Bad one year momentum companies (with the largest one year price fall) performed well and was up 31%
- Companies with a good Free Cash Flow score (combines Free cash flow growth with free cash flow stability), but not the best, did well and was up 30.7%
Results were ALL over the place
If you look at the Results all Markets table below you will see that how the rest of the strategies performed.
Performance was all over the place – meaning it was impossible to say what strategy would have done well based on long-term back tested returns of strategies that work.
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 9,000 companies worldwide
We looked at the performance of the following 19 investment strategies from 1 January 2019 to 31 December 2019:
- Large vs small companies (Quintile 1 = Biggest 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 trading more than €25,000 per day
We excluded companies with a market value less than €50 million and a median 30 days trading value less than €25,000.
This left a universe of around 9,000 companies which means each quintile consisted of about 1,800 companies.
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
- Zew Zealand
- Hong Kong
- Singapore
All companies in five groups – Quintile 1 the best
To test each of the strategies, using point in time data (so no look ahead bias), on 1 January 2019 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.
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What worked world-wide?
The following table summarises how all 19 investment strategies performed world-wide:
For reference the MSCI World Index returned +28.4%
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: 23.2%
- Maximum return of Quintile 1 strategies: 28.5%
- Minimum return of Quintile 1 strategies: 19.6%
What worked?
Here are the two best performing Quintile 1 strategies:
- Free Cash Flow (FCF) Score (Calculated by combining Free cash flow growth with free cash flow stability) was the best strategy returning 28.5%
- Investing in companies with the biggest one year price increase (Price Index 12m) was the second best strategy returning 26.6%
What did not work?
These were the worse Quintile 1 strategies:
- The best ranked Value Composite Two companies was the worst performing strategy even though it returned a respectable 19.6%
- Adjusted slope 90 days , a momentum indicator - was the second worst performer returning 19.7%
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What worked in Europe?
Below is the performance of all 19 strategies in Europe:
For reference the European STOXX 600 Index returned: +23.2%
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: 23.7%
- Maximum return of Quintile 1 strategies: 29.6%
- Minimum return of Quintile 1 strategies: 19.5%
What worked?
These were the best two Quintile 1 strategies:
- Buying the 20% of companies with the biggest 12 month price increase (Price Index 12m) was the best investment strategy in Europe, it returned 29.6%
- Using the Adjusted Slope 125 day / 250 day momentum indicator you would have earned the second highest return in Europe of 29.4%
What did not work?
The two worse performing Quintile 1 strategies were:
- Qi Liquidity , the indicator that finds companies with low traded liquidity gave the lowest return of 19.5%
- The ERP5 investment strategy gave the second lowest return of 20%
What worked in North America?
Below is the performance of all 19 strategies in North America:
For reference the S&P 500 Index returned +28.9%
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: +21.7%
- Maximum return of Quintile 1 strategies: +34.1%
- Minimum return of Quintile 1 strategies: +14.2%
What worked?
The two best performing Quintile 1 strategies were:
- Free Cash Flow (FCF) Score (Calculated by combining Free cash flow growth with free cash flow stability) returned 34.1%
- Just simply buying large companies (Quintile 1) was the second best strategy at +29.1%
What did not work?
The two worse performing Quintile 1 strategies were:
- Investing in the best Value Composite One companies did not do well returning only 14.2%
- Qi Liquidity , the indicator that finds companies with low traded liquidity also did not perform well returning 14.3%
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This was your best strategy in Japan
Below is the performance of all 19 strategies in Japan.
For reference the Japanese Nikkei 225 Index returned +18.2%
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: +22.7%
- Maximum return of Quintile 1 strategies: +31.4%
- Minimum return of Quintile 1 strategies: 13.2%
What worked?
The two best performing Quintile 1 strategies were:
- The Magic Formula (MF Rank) performed best returning 31.4%
- Dividend Growth (geometric average dividend per share growth rate over the past 5 years) was the second best strategy returning 29.5%
What did not work?
The two worse performing Quintile 1 strategies were:
- Good momentum companies selected using Adjusted Slope 90d: 13.2%
- Price Index 6m good momentum companies returned: 14.6%
What worked in Asia and Oceania Markets?
(Australia, New Zealand, Hong Kong and Singapore companies are included in this analysis)
I could not find a reference index for this market, please let me know if you have a suggestion.
Even though returns were low here the performance of most strategies looked surprisingly 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: +14.7%
- Maximum return of Quintile 1 strategies: +22.2%
- Minimum return of Quintile 1 strategies: +8.9%
What worked?
The two best performing Quintile 1 strategies were:
- Good quality companies selected using the Gross Margin (Novy-Marx) indicator returned: +22.2%
- The best rated Piotroski F-Score companies recorded the second highest return at 19.5%
What did not work?
The two worse performing Quintile 1 strategies were:
- Qi Liquidity , the indicator that finds companies with low traded liquidity also did not perform well returning 8.9%
- Good momentum companies selected using Adjusted Slope 90d returned 9.7%
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 the short-term anything is possible.
A warning – the best strategies may stop working
Remember just because a strategy did well in 2019 does not mean it will continue to do so. As you can see the same strategy performed well in one region and terribly in another.
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 have no clue as to what strategy will work in the future and if someone says he does, he is lying.
The best investment strategies we have tested
If you want to read about the best strategies we have tested click here: Best investment strategies Quant Investing
Wishing you profitable investing for 2020
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Further reading about the best yearly returns:
Your absolute best strategy in 2016
Your absolute best investment strategy in 2017 – nearly everything worked
The best investment strategies in 2018 - World-Wide
What investment strategies performed best in 2019 – 19 strategies tested
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