A Quick Look at Stockopedia Q V M factors

Monday, Sep 09 2019 by
19

These are just some musings looking at the performance of the Stocko factors (Q V M) and how their performance changes over time.

When you look at the Stocko performance graph for Momentum Rank (Mkt Cap > £100M, quarterly rebalanced) it looks something like this:

Momentum Rank Quintiles (linear scale)

5d76c63447d69m100q5lin.png

The top quintile is racing upwards and the other quintiles are lined up below, with the bottom quintile heading downwards.

However this gives a rather distorted picture. Once a quintile is above its peers then an increase by some fixed percentage will look better for the higher quintile than the same percentage increase for a lower quintile because the percentage gain is building on a higher base.

We can correct for this visual distortion by using a log scale for the graph. With a log scale the same percentage change results in the same amount of vertical movement regardless of previous performance.

Momentum Rank Quintiles (log scale)

5d76c67f0e564m100q5log.png

It is much easier on this plot to compare the relative performance of a set of quintiles. Simply compare the slope of each quintile to see which is performing better at any given point in time.

For example look how much more similar the performance in 2017 seems to be across the upper quintiles using the log plot. You can also see that the bottom (red) quintile is actually performing very strongly in 2016 using the log plot; something that is harder to see in the linear plot.

But why visually compare slopes when we have a computer? I can instead compute the slopes and plot that. In practice what I have computed is the return over the previous year on a rolling basis. This is where we go next.

Momentum Rank Quintiles (Rolling 12-month Return)

5d76c6e6dea45m100q5all.png

Here is a plot of rolling twelve month returns for the quintiles of Momentum Rank.

It is rather cluttered. Over any given year the performance difference between the quintiles is not very great so the various lines tend to overlap. During the last half of 2016 it is clear that there is not a lot to choose between any of the quintiles. Clearly there are times when no quintile performs significantly differently from the index.

To make things a bit easier to see, let's look at just the top quintile…

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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9 Posts on this Thread show/hide all

iwright7 10th Sep 1 of 9
2

Nick, Another fascinating set of observations. Curious to know if you have any theories about what is driving particular factor on/off periods - market sentiment/greed/fear etc?

The famous speculator Jesse Livermore though once commented..... "Don’t concern yourself with why things are happening only observe what is happening. The reasons why will eventually be revealed to you, but by then it will be too late to make money. The move will be over".

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Nick Ray 10th Sep 2 of 9
3

In reply to post #511596

Curious to know if you have any theories about what is driving particular factor on/off periods - market sentiment/greed/fear etc?

In an earlier draft I did speculate a bit about this but I took it out because I felt that it went beyond just describing what the graphs do.

However since you have asked (!), what I noticed was that the top quintile for Q and M tends to fall later than the index when the rolling 12-month returns are falling and that makes up most of the out-performance for high-Q/high-M over time. So the benefit appears to come from being a bit more resilient when things are tough rather than from racing away in the good times.

But it is only five years of data and about two and a half examples of the theory in action so who knows?

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crazycoops 10th Sep 3 of 9
2

Fascinating analysis Nick, thank you. The conclusion is pretty much Fundsmith’s investment strategy...

Buy quality companies
Don’t over pay
Do nothing

Why fight it?

Blog: Share Knowledge
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Howard Marx 10th Sep 4 of 9
4

In reply to post #511751

"Buy quality companies
Don’t over pay
Do nothing"


Crazycoops, I think this strategy will come unstuck in the next couple of years.

The reason I say this centres on Stockopedia's definition of quality, which includes some pro-cyclical components such as

  1. Long Term Average Return on Capital Employed

2. Long Term Average Free Cashflow to Assets Rati

3. Long Term Operating Margin Stability

4. Long Term Sales Growth Consistency

Ten years have elapsed since the last global recession. Because of this, a large number of companies serving end-markets where demand is cyclical now appear to be 'Quality'. 

It's instructive to see that in the UK the list of highest QV stocks is almost entirely made up of cyclical names:

5d77a391294dehigh_QV.jpg

In an economic slowdown/recession, I'd expect this thin veneer of Quality (& also Valuation) would likely soon erode, making this a challenged portfolio.


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Nick Ray 10th Sep 5 of 9
4

My version of the simple "no free will" quality portfolio would be QM rather than QV and sort for highest Mcap, then maybe drop anything with a high volatility. That gives the following list, where only BOO has anything close to a high volatility (40% ish).

Ticker Name Mkt Cap £m Last Price % Price Chg QM Rank Sector
AZN AstraZeneca 91884 6795 -2.98 96 Healthcare
DGE Diageo 79850 3310.5 -1.98 95 Consumer Defensives
REL Relx 37230 1844 -3.73 97 Industrials
SN. Smith & Nephew 16915 1872.92 -3.16 94 Healthcare
FERG Ferguson 14542 6226 -1.95 94 Consumer Cyclicals
BRBY Burberry 9184 2159 -3.27 99 Consumer Cyclicals
NXT Next 8047 6022 -0.3 98 Consumer Cyclicals
SGE Sage 7541 665 -4.01 97 Technology
HLMA Halma 7494 1913 -3.19 99 Industrials
JD. JD Sports Fashion 6157 679.82 7.46 99 Consumer Cyclicals
AVV AVEVA 5908 3472 -5.08 99 Technology
BKG Berkeley 4958 3987 1.06 94 Consumer Cyclicals
RMV Rightmove 4767 520.6 -3.41 98 Technology
HIK Hikma Pharmaceuticals 4647 1917.5 -0.026 96 Healthcare
HSV HomeServe 3881 1137 -1.98 95 Consumer Defensives
TATE Tate & Lyle 3381 732.4 1.47 94 Consumer Defensives
HWDN Howden Joinery 3287 547.2 -0.29 97 Consumer Cyclicals
ASHM Ashmore 3239 458 0.79 97 Financials
BOO Boohoo 3162 273.7 0.48 98 Consumer Cyclicals
DPH Dechra Pharmaceuticals 3028 2834.41 -3.92 95 Healthcare


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HumourMe 10th Sep 6 of 9

A very interesting article (as usual). Stocko downplay the growth rank https://help.stockopedia.com/product-guide/stockranks/basics/the-growth-rank and it isn't a component of the StockRank, however, I feel it fits nicely with momentum. Do you monitor this at all or is it quietly slumbering before potentially bursting into life? Probably a lot further in the cycle though!

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crazycoops 10th Sep 7 of 9
1

Howard, you are correct that QV throws up a lot of cyclicals. The Fundsmith approach is to avoid cyclicals. And Nick’s list of QM is closer to what I had in mind. My own approach is to screen for quality at outset and then get under the bonnet to see if there is an investment thesis (in my case, growth and/or income) that I like. It is good to observe Nick’s pure quant approach nonetheless.

Blog: Share Knowledge
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iwright7 11th Sep 8 of 9

The Fundsmith company selection criteria are listed here (and yes it includes Growth):

High quality businesses that can sustain a high return on operating capital employed;
Businesses whose advantages are difficult to replicate;
Businesses which do not require significant leverage to generate returns;
Businesses with a high degree of certainty of growth from reinvestment of their cash flows at high rates of return;
Businesses that are resilient to change, particularly technological innovation;
Businesses whose valuation is considered by the Company to be attractive.

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Nick Ray 11th Sep 9 of 9

In reply to post #511861

Stocko downplay the growth rank https://help.stockopedia.com/p... and it isn't a component of the StockRank, however, I feel it fits nicely with momentum. Do you monitor this at all or is it quietly slumbering before potentially bursting into life?


The Stocko Growth Rank has performed like a diluted version of the Quality Rank and the different Growth Rank quintiles are not as separated in performance compared with the Quality Rank.

So the Quality Rank works better as a factor. It seems to me it is like an improved version of what the Growth Rank is trying to do.

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