Guru Strategy Review Q1 2016: Value strategies boosted by Natural Resources

Three months ago we reflected on how Growth and Momentum had been winning investing strategies in 2015. But all that changed in the first quarter of the new year. Stockopedia’s tracking of 60 strategies inspired by the legends of finance saw most investing styles get beaten back by rocky market conditions. But there were still some strong results, plus a marked upturn among the Value strategies, driven by a sector that’s long been out of fashion - natural resources.

Before taking a closer look at how events unfolded, it’s worth having a quick recap on how these strategies work and what the performance stats tell us. Since late 2011, we’ve been tracking the returns from a range of approaches used by some of the world’s best known investors. They’re rebalanced quarterly to ensure that the the shares in each portfolio match the rules of each strategy as closely as possible. We don’t account for the drag of trading costs or the bonus of dividend payments.

It’s important to know that these models aren’t always realistically investable. At times, there may be very few companies that meet the rules of some of them. And because there are no restrictions on company size, sector or index, there’s no simple way of benchmarking them. So we show the FTSE 100 for the sake of comparison rather than as a meaningful benchmark.

Here is how the various main UK indices and Guru Screens performed in Q1:

Value strategies bounce back

Last year, Value and Bargain investing styles ended up being the two worst performers overall. Their composite returns in 2015 (aggregating the returns from all the strategies in each category) were -1.4% and -20.6% respectively. By contrast Growth and Momentum generated solid composite returns of 21.9% and 10.1%.

But in the first three months of this year, the tables were turned. Value and Bargain strategies scraped positive returns of 1.7% and 3.2%. And while those might sound like slim gains, they were much better than the -6.1% from the Growth strategies. Quality and Momentum strategies also finished up in negative territory, as did the main market indices.

One reason why those Value strategies performed slightly better is that a number of them were holding mining and oil & gas shares. These sectors have languished in the abyss since the commodities crash started around five years ago. During that time, a slump in prices of metals, minerals, oil and gas has dragged on the valuations of both small and large cap stocks. As a result, a number of them have turned up on Value screens, particularly those with assets and production revenues (as opposed to more speculative exploration plays). A pick up in their prices in Q1 2016 - something that could end up being short lived - had a meaningful influence on those strategies.

A quick look at the relative strength of some of the key FTSE 350 sector indices supports the view that natural resources strengthened in Q1. The top four performers against the market during the quarter included mining, metals and oil & gas:

The best performing Value strategy in the quarter was the Ben Graham Enterprising Investor screen, with a portfolio return of 17.2%. That was helped by a position in Egyptian mining group Centamin, which rose by 37.3%. Elsewhere, the Piotroski F-Score Price to Book Value screen returned 16.3% helped by positions in mining groups Ferrexpo and Trans-Siberian Gold. Another one was the James O’Shaughnessy Cornerstone Value screen. This strategy has been under pressure since last spring, and at the last rebalancing it picked up several mining and oil and gas services groups. Holdings like Anglo American, Glencore, Petrofac and Vedanta Resources, contributed to a 10.0% return during the first quarter.

Dividend strategies improve

The overall best performing strategy during Q1 was Dividend Dogs of the FTSE, which finished up 19.4%. Overall, Income strategies achieved a 1.2% gain in the period. Again, the bulk the Dividend Dogs’ gains was achieved through holdings in mining stocks like Anglo American and Glencore. This was a strategy that we previously singled out for its poor performance in 2015 as a result of being overweight in sectors like commodities and supermarkets, which have been under huge pressure. Given that the two companies that drove the performance have either scrapped or substantially cut their dividends, means that it’s still far from clear that a blue chip dividend strategy like this will work well through the rest of this year.

Elsewhere, the Geraldine Weiss-inspired income strategy returned 6.3%, while Winning Growth & Income - a strong long-term performer among the guru screens - delivered a 4.0% gain.

Among the Momentum strategies, it was Earnings Surprises that lead the way, with an 11.4% return during the quarter (we wrote about that performance of that strategy here). That was followed by the Earnings Upgrades screen, with a 4.1% return. Meanwhile, the Growth and Quality screens saw the Greenblatt Magic Formula and Piotroski High F-Score strategies deliver 1.7% and 1.6% respectively. But it was a much leaner period for many of the high flying strategies that dominated in 2015. The likes of the Jim Slater Zulu Principle, Bill O’Neill Can-Slim, and the Screen of Screens all took a breather in Q1 and ended up with single figure negative returns.

What to expect this spring?

During more than four years of tracking these guru-inspired investing strategies in the UK, we’ve seen periods when market conditions really play to the strengths of certain investing styles. While Growth and Momentum benefitted most in 2015, Value strategies have picked up in early 2016. Arguably, that could be a false signal because it’s not at all clear that UK markets are cheap enough for Value screens to make a sustained break out. Markets wobbled in the first three months of the year but have regained most of the lost ground. If that continues, it won’t take much for the Quality, Growth and Momentum strategies to pick up the pace.