Guru Strategy Review 2013: Value And Momentum Lead The Way

12th Dec '13 by Ben Hobson

3 comments 12604 reads

The stars aligned to produce an exceptional year for equities in 2013, with small and mid cap stocks proving to be some of the biggest beneficiaries. For Stockopedia’s 60 GuruModel investing strategies, which are inspired by the legends of finance, it was always going to be a tough call to outperform some staggering index gains, but many of them managed it nonetheless.

Since the height of the economic crisis in 2009, central bank money easing and low interest rates have conspired to enhance the appeal of shares for investors starved of returns elsewhere. Inevitably, some think that this sharp rise in confidence is becoming a bubble and that a potentially deep pullback could be on the cards if company earnings falter or when the QE rug gets pulled. But while there have been signs that tapering of QE, at home or in the US, could cause turmoil for stocks, other commentators think the market is in good enough shape to keep rising, at least in the near term. Either way, rising market valuations mean that sensible stock-picking is more crucial than ever for investors seeking quality shares that can better weather future volatility.

The indices surged

Year to date, the FTSE 100 has risen by around 10%, the FTSE All-Share is up by 12% and the FTSE Smallcap (XIT) has soared by 37%. Even the AIM All-Share, which is heavily weighted with two of the worst performing sectors this year (oil & gas and mining), has managed a 17% gain. Meanwhile the Stockopedia’s All Cap GuruModel Composite has delivered an impressive 30% return, with 85% of our long-only investing strategies beating the FTSE 100. Unsurprisingly, it was a bad year for short sellers with earnings ‘red flags’ seemingly no deterrent to bullish investors who drove up prices anyway and put shorting strategies like the Beneish M-Score to the sword.

In March, John Waggoner of USA Today wrote that the three years since the market bottomed in 2009 had been “the least-loved bull market in modern history”. Private investors, he said, had missed out on much of the market advance because they were fearful of returning to equities after being so badly burnt during the financial crisis. On this side of the pond, the latest evidence suggests that individual investors are once again being seduced by shares. The Investment Management Association recently reported…

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pka

12th Dec '13

I think it is extremely misleading to benchmark your guru strategies against the performance of the FTSE 100, particularly in a year when the FTSE 100 has risen by 10%, the FTSE All-Share by 12% and the FTSE Smallcap (XIT) by 37%. This is because the guru portfolios are equal-weighted in the shares they contain, whereas the FTSE 100 is weighted by market capitalisation so its performance is dominated by that of a few mega-cap shares.

If you must use an index based on the FTSE 100, you should use the equal-weighted version of that index. However, the average market size of the equally-weighted shares selected by your guru strategies are much smaller than that of the companies in the FTSE 100. Therefore I think it would be fairer to benchmark your guru strategies against the FTSE Smallcap index (XIT), whose 37% rise makes Stockopedia’s All Cap GuruModel Composite return of 30% look not so impressive!

Edward Croft

That's a fair comment though people in general are anchored on the FTSE100 price - it's the one price that everybody looks at and that everyone hears on the radio, so it's of interest to the general reader.

The FTSE Small Cap XIT index has only 129 stocks in it. The Stockopedia Screening system has 800 stocks covered. We have a lot of large cap only screens, as well as a lot of screens with small caps in them. We don't have an all-cap index to benchmark against, so it's hard to make a comparison. We quoted a variety of indices above in the article including the Small Cap XIT so it's not like we are hiding anything.

It should be stated though that we are merely a conduit for these criteria in the Screens. They are 'Guru' screen precisely because we are testing the criteria that have been published elsewhere in books and research papers. Frankly, while there are a sub-set of strategies that I expect to have significant alpha, overall I would have expected the entire set to match the market as it is a smorgasbord of strategies. If there has been outperformance en-masse then either it's an indication that they got lucky, or that our data-set is more timely and cleaner than that available to most of the market, or perhaps it's just further validation that Mkt Cap weighting indices in general is a pretty daft idea.

14th Dec '13

OK, but in that case why not use the FTSE All Share index as the benchmark? It would provide a fairer comparison for your guru strategies and is almost as well known as the FTSE 100 index.

Guru Strategy Review 2013: Value and Momentum lead the way

The indices surged

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Ben Hobson

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