Can the NAPS beat various international markets?
Last week I shared some of the results of the NAPS strategy in US markets. While there are many ways to implement this strategy, at its simplest the NAPS just purchases the top 2 ranked shares in each of 10 sectors and holds for a year, rebalancing annually ad-infinitum. I thought I'd share some further results from other markets for your perusal.
Australasia
As some may know, I'm married to an Australian and have a lot of family in Sydney. Australia is our second largest subscriber region after the UK and I've got a keen personal interest in seeing the service thrive down under. Australia is an interesting market as it is rather dominated by basic resources sectors - nonetheless there are profitable, durable businesses across all sectors. We didn't launch coverage of Australia until 2016, but in spite of a nasty recent drawdown the NAPS has returned 11% annualised (before dividends) against the ASX All Ordinaries at 4.5% annualised.
Europe ex-UK
The set of markets below includes what you'd traditionally call Western Developed Europe ex UK. A 10% annualised return for the NAPS is double the 5% for the FTSEurofirst ex-UK index, but the return is actually considerably lower than the 90+ ranked decile for Europe as a whole. While the outperformance versus the index is strong, it does seem that in this instance the additional diversification has bettered the results.
We find better results when focusing on individual countries or regions within Developed Europe - for example:
Germany
Germany is the powerhouse of Europe industrially, and that's shown in these returns.
Scandinavia
Very strong showing from the Viking lands.
French-ish
Includes France, Belgium, Netherlands. The French showing is poorer than most other territories in Europe, but as a big market it can dominate the listings. Maybe weighed down by all those strikes?
Asia
India
Quite an astonishing rally from the pandemic lows in the Indian market. We ran an office in Bangalore for many years and it is incredibly impressive to see how quickly it is developing as a nation. But the stock market there is volatile and hard to access for international investors.
Japan
Japan is a huge market by market cap but a notoriously tough market to beat. The QVM factor approach has struggled there.
Next up
All in all these results show the NAPS to be a very robust “long only” equity strategy in most markets around the world. If you have any requests for other markets I will post screenshots below in the comments where I can. I’m off to France tomorrow for 2 weeks, but it is a working trip for me - so please excuse me if I’m slow to respond.
I'm currently working on figuring out the optimal rebalancing periods for the NAPS strategy. This is a trade-off between performance of the underlying factors and the added transaction costs of rebalancing frequency. It's generating some pretty clear results that I'll share soon.
Disclaimer
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18 comments
can you make the UK Naps portfolio performance available to everyone and not just those who subscribe to UK markets. Alternatively, can you run a NAPs portfolio for each market and post results.
also, can you show the naps returns for a glabal portfolio not just a portfolio focussed on individual markets.
I would be interested to see if the returns are significantly higher by choosing the best ranked across the world vs a localized portfolio.
Yes would be interesting to compare. Just looked at the US performance and the Top stockranks is the worst performing +38% from inception, best performing was value at 309%, QM was 82%, VM was 89%.
Is there any plan to give subscribers a toolset to do these kinds of tests themselves? That would be incredibly useful!
Does anybody actually invest in a NAPS style?
Thanks for the article Ed. I was interested to see that seasonal effects on returns are mentioned in one of the comments relating to this article. As far as I am aware, one of the apparently most entrenched and statistically significant seasonal effects is the poor performance of international stockmarkets in the month of September. For example, according to Liberated Stock Trader, S&P 500 shares held in September only during the 40 years to 2020 generated an average monthly loss of 0.83%. Apart from August (-0.08%) all other months produced positive returns (I assume these figures ignore delaing costs). Bearing this in mind, I would expect retrospective analysis would show that the NAPS portfolio would perform better if it was sold at the end of August and then re-purchased in re-balanced form at the start of October. Retrospective analysis can not be used to predict the future, but bearing in mind the need to balance the NAPS portfolio regularly, I would suggest that this approach is promising.
A bugbear of the NAPS portfolio is the cost of re-balancing (particularly arising from spreads) but the above idea could actually turn this relatively high dealing frequency into an advantage.
Very interesting article, thanks. Have you considered comparing individual markets/indexes to try to identify those with growing momentum? A chart of the amount of stocks in an index over their 200 day MA may give a simplistic view on this. A way to include index EPS growth, even better. The idea being to add a gearing effect to a global NAPS portfolio to rebalance into markets signalling outperformance. Other suggestions on how this may be achieved are welcome.
I'd also like to see an Aisa / Aisa ex China NAPS.
Really enjoying this series, keep up the great work!
Thanks for this. I was going to write to you about other countries and here it is!
I was wondering Ed, when you reported on Scandinavia , which countries did you include, or does stocko group them together somehow? I live in Sweden and was thinking of doing the Swedish NAPS. Is it better to do Sweden only or a combination of Denmark, Sweden, Norway and Finland? Do you have any stats on that? Thanks
Also, when you mention QVM, do you mean QM and VM like in what you use for the UK NAPS? Remember you first started using QVM for the NAPS and changed to the combination a few years back. Thanks for sharing this . Most interesting .
@stonethecrows - I'll try and answer the Scandinavian question in due course. A 20 share high ranked portfolio diversified across sectors gets tricky to implement when markets are small. But I've also found that 10 share portfolios are surprisingly robust against their 20 share brethren... so it could be that a 10 share NAPS in any market works pretty well over the long term if you are smart about diversification.
Re.. the QVM question... I've been using the "StockRank" - i.e. the fully blended Q+V+M ranking. I'm not testing the half QM / half VM approach that I've been using for the last couple of years in the UK in my NAPS blogs.
Really looking forward to the results of the optimal rebalancing periods. I was interested in the idea of staying in the market while the index 50 day ma is above the 200 day ma and exiting when it’s below.
Yes, Chris Dillow of IC is a champion of this approach.
Hi Ed,
The NAPs articles are great so please keep them coming :)
I've got a couple of questions in areas where I'm assuming there could be some performance improvements:
1. Have you looked at how a StockRank stop loss might boost NAPs performance? E.g. sell when the StockRank drops to 50. If buying is based on QM or VM, then it could make sense to link a stop loss to that too.
2. Is there a better time of the year to select a NAPs portfolio? E.g. Is there a point where Stockopedia has the freshest data and is, therefore, most reliable? An example might be in August once most companies have announced their half-year results.
Cheers,
Had a look at this years NAPs and all the big fallers are still above SR of 50. With QM/VM, most are still about 50, Liontrust Asset Management (LON:LIO) is now QM 49.
So I feel 50 is too low, maybe 80 would work better but every year is different.
A while ago did an exercise on stop losses, one year the performance was considerably reduced by stop losses as shares recovered some by over 100%.
Re timing, January seems quite a good time to start, SNAPs is July, think NAPs has performed better.
Thanks @kieranj077
Is it just me or do the links seem to be broken?
Yes broken on share tickers. I reported it but they cant see the problem.
Thanks for a great article. As a UK only subscriber who often wonders about other regions, I'd be interested if there is any value in a composite approach, I.e. a global NAPS which takes the best ranks from a number of, or all regions. Would that work? I ask this to try understand if a portfolio should focus on one region, duplicate strategy in multiple regions and therefore double or tripple the number of stocks held, or keep the same number of stocks across multiple regions.
Also very keen to read about your rebalancing work as that topic is a constant dilemma in my NAPS portfolio!
Many thanks!
@Northern Seahawk - I'm trying to get some work completed on rebalancing costs this week. Am juggling a few priorities though.
Regarding a composite approach, I will have a think about the best way to implement this. What I can do is easily create a group of markets and test the strategy across them. So if you'd like to see a UK, EU and US composite approach - that's easy enough to do. It will though most likely get dominated by the larger territories unless I forced some constraints in place.
Edward, a combination UK and Australian NAPS would be interesting given these countries are your biggest client base.