Growth investing strategies lead the recovery in Europe

Stockopedia’s 60 guru-inspired investing strategies will be rebalanced later this month. Given the sharp market pull back one month ago, it will be interesting to see which of the screens and styles have suffered and which of them have managed to ride out the correction. What’s already clear is that in Europe, a number of Growth strategies are quickly bouncing back.

After a strong start to 2015, the FTSEurofirst 300 was hit hard by the declines in late summer, leaving it up by around 4.2% year-to-date. By mid-July, the FTSE Euromid, a benchmark of mid-cap pan-European companies, had risen by 20%. But the performance of that index is now a more modest 11.3%.

By comparison, the 10 Growth strategies tracked by Stockopedia have returned an aggregate 15.8% in Europe this year. That performance has been dominated by strategies that focus on growth at a reasonable price (GARP).

Winning GARP strategies

Leading the pack is the Jim Slater Zulu Principle strategy, which is up by 26.5% in 2015 (see the performance chart below). That’s followed by James O'Shaughnessy Cornerstone Growth (+22.1%) and the Martin Zweig Growth screen (+21.6%). These strategies combine a focus on earnings growth, positive momentum in the form of strong relative price strength and attractive valuation. The Slater and Zweig rules measure valuation using the price-to-earnings ratio, while the O’Shaughnessy screen uses price-to-sales.

Just a reminder that all Stockopedia’s guru strategy performance figures exclude trading costs and are based on quarterly rebalancing. In reality, these costs would reduce returns.

Over the past quarter the best performing share in the Zulu Principle portfolio was a small French IT business called Octo Technology, which gained 35.3%. There was also a 28.4% rise at Swedish shop fitting company ITAB Shop Concept.

The Cornerstone Growth portfolio did well from a position in a German online financial services firm called Hypoport, which has risen by an impressive 45% since the end of June. It also saw a 30% gain in German bio fuels distributor, Verbio Vereinigte Bioenergie.

It’s worth noting that the European guru strategy portfolios include UK shares. With that in mind, it’s interesting that six of the 22 holdings in the Martin Zweig portfolio are major UK housebuilders. Obviously the systematic process of rebalancing takes no account of diversification. Even so, the portfolio has only lost on one of those housebuilders - Bovis Homes, which is down 4.8%. Among the winners were Swiss asset manager Partners Holding, up 18.3%, and Swedish telecoms company Bahnhof Publ, up 14.8%.

Another strong growth strategy performance has been one inspired by the approach of US investor William O’Neil. This differs from GARP screens by largely overlooking the need for stocks to be reasonably priced. Instead, it focuses on earnings growth and price momentum as its key drivers. The strategy has produced a 21.6% gain since the end of June. Among the winners here have been Hypoport and Belgian cake and biscuit maker Lotus Bakeries, which has returned 31.6% since the last rebalancing.

Elsewhere, a strategy inspired by Robbie Burns, the Naked Trader, has returned 13.5% so far this year. However, that relatively modest performance against other growth screen belies a remarkably smooth performance line both in the UK and Europe since Stockopedia began tracking it (see the performance chart below). Over two years the strategy has returned 40% in Europe, which is just ahead of the 37% return in the UK.

The worst performing European growth strategy this year has been the Philip Fisher Growth screen, which is lagging by -0.5%. This is a strategy that did reasonably well in Europe in the 18 months after Stockopedia began tracking it in May 2013. But the portfolio failed to match the strong performance of the FTSEurofirst 300 in the early part of 2015 and has been falling sharply since early summer.

It has now been a month since world markets took a dip. In that time growth investing strategies in Europe have shown themselves to be some of the most resilient to the volatile conditions. GARP strategies - blending growth, value and an element of momentum - have done particularly well. With the European Central Bank’s quantitative easing programme continuing, European shares may well continue to prove attractive. Barring any shocks, that’s likely to be good news for these strategies. We’ll have a closer look at the overall strategy performances when the screens are rebalanced at the end of September.

We’ve created a screen for Stockopedia subscribers showing European shares that are currently qualifying for the highest numbers of growth strategies. We’ve also included the Growth Rank and Stock Rank for each share - to give a stronger indication of those with the highest exposure to growth, quality, value and momentum factors. You can find it here.