A Guide to 2017's Winning and Losing Investing Styles

The FTSE All Share rose by around 7.8 percent in 2017. But if you look behind the scenes, you’ll find that some parts of the market did exceptionally well, while other parts lagged.

In the past, if you wanted to know the finer details about these trends and what could be learnt from them, you’d have needed a hedge fund manager or a quant analyst to tell you. But not anymore. With the help of the StockRank Styles and RiskRatings, which we introduced this year, we can see exactly which types of investment approach worked in the market in 2017, and which didn’t.

Understanding Style Investing

Back in April 2013 we launched the StockRanks as a way of seeing the investment strengths of any share. Stocks are scored and ranked based on their exposure to Quality, Value and Momentum (and we use a combination of many measures to make that calculation).

With the combined StockRank we’ve seen very clear outperformance from high ranking shares over the past four years - and that continued in 2017. Indeed, high StockRanks are the foundation of Ed Croft’s NAPS portfolio, which he’ll be reviewing in the coming days.

One of the advantages of exploring these Quality, Value and Momentum ‘factors’ is that their different combinations help pick out radically different styles of investing. These styles map to different investing tastes which come in and out of vogue in different market environments.

We explore these different styles in a lot of our articles on the Stockopedia site. But if you’re new to this, here’s an easy visual way to think about this framework:

In essence, high exposure to at least two of the three factors (Quality, Value and Momentum) creates a winning style.

High Quality and Momentum (but poor Value) = High Flyers

High Quality and Value (but poor Momentum) = Contrarians

High Value and Momentum (but poor Quality) = Turnarounds

High Quality, Value and Momentum = Super Stocks.

Tom Firth and Oli Cooper, our analysts at Stockopedia, have crunched the performance figures, and their work in the following chart shows just how the StockRank Styles have done since the inception of the StockRanks in 2013.

* 2013 data begins on 20 April 2013 (the StockRanks inception date)

Over that period, it’s clear how well the winning profiles have performed, with Super Stocks, High Flyers, Turnarounds and Contrarians, all trouncing the losing styles.

The chart for 2017, however, shows that the winning style this year has been High Flyers. High Quality, high Momentum (but potentially expensive) stocks have been the big winners, with a 19.2 percent return. At the other end of the spectrum, Value Traps (cheap but low Quality and low Momentum) have seen a minus 5.2 percent return overall.

These findings tally very much with observations that value investing has been on its knees in 2017. Meanwhile, high quality, high momentum stocks have been very much sought after, at almost any price.

Which companies have been High Flying?

A lot of the big gains seen by High Flyers occurred in the first half of the year. Back then, it was stocks ranging from small-caps like dotDigital and Gear4Music to larger companies like Boohoo.Com, ASOS and Fever Tree Drinks that were leading the High Flyer list. You can find current HighFlyers using the menu in the StockRanks portal.

One important point to note - and this is a feature of High Flyers - is that they can fall sharply when either their quality or momentum weakens. This is exactly what we’ve seen in shares like Gear4Music and Boohoo.Com this year. They have switched styles to become Momentum Traps. Meanwhile, the others continue to be rated as High Flyers.

RiskRatings - did high risk investing win in 2017?

In tandem with the new StockRank Styles, we introduced RiskRatings earlier this year. These are our classification of the historic volatility of every company’s share price. The calculation itself focuses on the standard deviation of daily price returns over the last three years (you can read more about it here). What it tells you what the likely future volatility of a share will be as (in general) historic volatility is a good predictor of future volatility.

The classification (from least to most volatile) ranges from Conservative, Balanced, Adventurous, Speculative and Highly Speculative.

Over the period from April 2013, what we see is consistently strong performance by the Balanced and Conservative brackets, with Adventurous portfolios running very close. Perhaps more telling is that shares in the Specialtive and Highly Speculative brackets have done far less well. It shows that accepting high levels of volatility just hasn’t paid off and that low-vol stocks have outperformed.

But in 2017 we see some differences from the medium-term trends. Once again, stocks in the mid-range Adventurous bracket have outperformed, with a 15 percent gain. Yet Speculative stocks have also done well, and that’s probably a nod to the fact that smaller, more volatile, shares have been increasingly popular on average in 2017. They are followed by Conservative and then Highly Speculative and Balanced categories.

These results match a lot of the research into volatility and how categories from Adventurous to Highly Speculative can outperform during ‘risk on’ market phases. The warning though, is that these categories can fall hard when the market turns. So if the market was to go ‘risk off’ in 2018 there could be a lot of money at risk.

Looking ahead to 2018

Analysis of the StockRank Styles and RiskRatings in 2017 shows that high quality, high momentum High Flyers were the big winners, and that stocks with mid-range Adventurous volatility have edged the best returns.

By contrast, Value Traps performed the worst, which confirmed the view that value investing isn’t working well in the current market. Over the longer-term, Super Stock portfolios continue to lead the performance chart, with all of the two-factor styles also performing well ahead of the market.

There was a mixed picture on which levels of volatility were optimum in 2017. But the longer term trends shows that the Adventurous, Conservative and Balanced volatility categories have seen the strongest returns.

Overall, these findings confirm that the market is very much risk-on and that funds are flowing into more speculative areas. The research around High Flyers shows that ignoring value can work well if a stock has good quality and strong momentum features. But without these characteristics there may be nothing to hold the price up except sentiment. So going into the new year, it’s more important than ever to double-check that stocks with rising prices genuinely deserve them.

You can download the RiskRatings book here

Happy Christmas and safe investing in the new year!