It has certainly been a strange market this year.

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5th Dec '20 by jjis

4 comments 576 reads

After the recent recovery in bombed out recovery plays I thought I'd take a look to see if that had changed the performance of the Ranks and I was expecting to see the bottom quintile outperforming recently.

Imagine my surprise when I found that the lowest Ranked stocks seemed to have been outperforming all year and all the Ranks seem to have outperformed the FTSE All Share just about.

So a strange market indeed. What do you say Ed?

Jamie.

PS. Not sure if the picture will come out as it was just an icon when I was writing this, but you can see the picture if you go to the Performance of the Ranks and select YTD. Similar picture in £10m+ too FWIW

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About the Author

Jjis

Premium Member

Worked in the City of London for over 20 years as a Fund Manager for a number of top institutions. In my career I managed billions of £'s across a whole range of different funds from Distribution funds, Investment Trusts, OEIC's / Unit Trusts & Pension funds. I was also involved in the management of Income funds more generally. In March 2009, I quit the City and escaped the rat race to earn my living from my own investments. Since then I have been managing my own income funds. I focus on UK stocks with a value / yield / quality bias and select from the whole market down to about a £50 million market capitalisation, although on occasions I stray into micro cap if I feel the investment case is compelling. This is because of liquidity considerations & the fact that I have VCT holdings which give me micro cap exposure. I also invest in Investment Trusts and ETF's for overseas markets or exposure to other asset classes, but again with the aim of achieving an income as well as diversification. I'm now trying to give something back by writing more regularly on my Blog / website - but can't make any promises about how regularly I will write here on Stockopedia, so check out my site. Compound Income more »

4 comments

Gromley

5th Dec '20

Thanks Jamie,

It is an interesting observation, it has been discussed in passing before, but I do think it probably deserves it's own thread as you have provided.

As you mentioned your image did not come up, but I think it will have been a variant of this :

(Although the posting software 'lets you' you cannot actually paste an image into your post; instead you need to save it to your device and then upload using the image icon in the editor bar)

5fcbd5a8dbaa020201205-srs-from_bottom.PN

I have used the quintiles (splitting the SRs into 5 bands) rather than the deciles and I have also plotted the chart from roughly the market bottom (late March) rather than the start of Jan.

Personally I think this is an important plot to think about, not because it shows a period when the StockRanks 'failed to work' but rather because there are important lessons to learn about what the SRs mean and how to use them (in all markets).

I haven't got the time right now to extoll on my views (collective phew!) so I'll leave that to anyone else inclined to take the discussion forwards.

Just one 'starter for 10' though - it may seem illogical for the index (FTAS in this case) to underperform all of it's constituent parts, but the primary explanation of this is that the index is 'market cap weighted' whereas the SR groupings are effectively 'equally weighted' - in short, the small caps (even above £50m cap) have outperformed the large & mega caps.

Hopefully you will have catalysed a useful discussion here,

jjis

6th Dec '20

Thanks Gromley for uploading a chart, I tried that but it did't work for some reason. Good point re the Market Cap weighting of index versus equally weighted for the Stock Ranks. It's interesting that the worst two quintiles have also done best since the low as you might have thought the higher Ranked stocks would have still had the edge until the latest Vaccine led rally, but as I said it's been a funny old year.

William K

6th Dec '20

Valuable point Gromley. It's not so much about when SRs fail, but what they mean in atypical markets. My observations this year have indicated that high SR share prices collapse faster and deeper in a crash than low SR shares, but recover much more quickly. The SR discriminates between the tennis balls and the eggs, to borrow an expression from Minervini. Below is a chart of SR shares* with a score >80 vs. the bench mark S&P 500. It clearly shows this behaviour - faster to fall and faster to rise. Overall the high SR shares have outperformed the benchmark by 9% over a 12 month period.

(This was a basket of 23 high quality shares hand picked on 1.2.20 just before the Covid crash but I suspect it's a fair representation of the >80 SR population, albeit a smallish sample.)

smegster

6th Dec '20

There is a good quote from Warren Buffet "Time is the friend of the wonderful company, the enemy of the mediocre"

Generally (if the stock ranking is working properly) the lower ranking companies will be the mediocre companies (which may outperform for short period - like this year) but generally over the medium/long term they will underperform the higher ranking "wonderful" companies

Here is the quintile ranking performance since 2013 (you might have to press submit to get the graph to load - sorry I was to lazy to extract the picture!)

For companies >£50m

The top quintile has risen +103% over the last 7 years

The lowest quintile has fallen -65.5% over the last 7 years

The 2020 data is just a blip, the lowest quintile has indeed outperformed the top quintile, but this just means that it has "risen" from (-70% to -65%) while the top quintile has "fallen" from (+123% to +103%).

Maybe over the next 7 years there might be more convergence between the lower and higher ranked companies but I wouldn't put my money on it!

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It has certainly been a strange market this year.

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Jjis

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