Mechanical Bull: A Riddle Solved

9th Aug '14 by Mechanical Bull

5 comments 12338 reads

I regularly check out the very slick dashboard on Stockopedia's home page. I've been a particular fan of the Guru Screens section. This includes a Guru index, which is a composite of all 60 or so long guru screens maintained by Stockopedia.

Over the past few months I have been increasingly puzzled by the droopy looking shape of the Guru composite index versus the FTSE 100 index. I've replicated the chart below to show you what I mean:

This shows the composite Guru index steadily pulling away from the FTSE 100, accelerating away during the second half of 2013 but then falling back over the last six months or so. In contrast,the FTSE 100 has been holding its ground pretty well during 2014.

Stockopedia handily group Guru screens by 'style performance' (e.g. Value, Growth, Momentum, Income etc.) so you can dive a bit more into the detail (although this is subscriber only service). Unfortunately, this doesn't really shed much light on proceedings. The FTSE 100 outperforms every one of these style indices over the past six months. In other words, whatever you investment style, you have probably lost money over the past six months. Unless of course your guru is a monkey with a pin and a list of FTSE 100 companies. In that case, you are probably slightly ahead.

This seemed to me to be a very strange state of affairs and so I decided to really put in some effort to work out what is going on. I spent a lot of time stratifying performance data and looking for patterns, After a number of false leads, I stumbled over something very interesting. It turns out I was looking in the wrong place. I should have been looking into the benchmark rather than performance factors of the guru screens. I will just cut to the chase and show you what happens when you overlay the FTSE 250 index over the composite Guru screens:

This clearly shows that the Guru composite index has been basically tracking the FTSE 250 over this period. Of course, a lot of FTSE 250 stocks appear in these Guru screens. I have done some rough calculations (rough as there isn't a straightforward way of screening out FTSE 250 stocks on Stockopedia) and I reckon about 30 per cent of all Guru screen appearances…

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Edward Croft

9th Aug '14

The FTSE 250 is of course a very good index. The median StockRank is currently about 75 - a monkey with a pin is, probabilistically speaking, likely to have more success building a portfolio in the 250 than on AIM - it's a shame that most monkeys with pins try to do the opposite !

I would be careful drawing too many conclusions about correlations from the above charts though. The FTSE 250 is market cap weighted across the mid 250, while the Stockopedia charts are generated through equal weighting across (last time I counted) around 800 stocks that qualify for screens. Some of those stocks are of course weighted multiple times according to the number of screens they qualify for. I would be hugely surprised if the Stockopedia Guru charts didn't track at least some UK indices most of the time.

As a point of note about differentiation - Direct Line Group is the highest weight in the FTSE 250, whereas (perhaps worryingly) Naibu has the largest weighting in the Stockopedia composite. Naibu would be weighted 6 times as heavily as Direct Line in the Stockopedia index. Only 100 of the FTSE 250 stocks qualify for any Stockopedia screens, with only 50 qualifying for more than 1. That's a significant divergence - the correlation between the charts is unlikely due to a large 250 weighting.

One last point - I doubt any 800 stock index could be designed to outperform all the time - if the Guru Composites do outperform it is more likely that they outperform due to a more appropriate weighting strategy. It's well known that equal weighted indices beat market cap weighted indices, and that value weighted strategies outperform equal weighted strategies.

Personally I take a distanced view. We are tracking these screens out of interest rather than trying to have them beat the market. While we've collected the rules, they were originally taken from third party texts. Our proprietary 'indices' are really the StockRanks deciles. We'll be putting the charts on the site in a much more visible way than the screening composites in due course - but with so much on the plate with the US launch and a redesign going on we've not had time to focus on getting them live - all good things come to those that wait !

shanklin100

Hi Ed

Naibu (NBU) is quite an interesting case with Stockopedia metrics including:

Earnings Manipulation Risk, High
Q, V and M of 99, 85 and 5 giving an overall SR of 68

meaning it passes 12 screens

With a forward P/E identified as < 1, and given the general distrust for Chinese companies, one real life feature that perhaps provides support is the dividend, which to date has been paid, with the forward yield currently forecast atover 15%.

I guess the question is whether you leave it in the Guru Composites/Guru Screens and view its impact over a protracted period, with reality at some point meaning either:

the Q and V numbers decline catastrophically, or,
M and SR increase to properly reflect it being massively under-valued

or just exclude it, and other companies with high Earnings Manipulation Risk,on the basis that their financials may be largely untrue.

No strong feeling either way here

All IMHO, DYOR, Martin

TheWatchmaker

10th Aug '14

Re: 'I reckon about 30 per cent of all Guru screen appearances are FTSE 250 stocks. In contrast, less than 10 per cent of appearances are for FTSE 100 stocks'

I've had a play with the number of screen qualifiers (excluding shorts) on Stockopedia. (Remember that one stock can qualify for multiple screens).

Table below shows the distribution.

*Index*	*Screen Qualifiers*	%
*FTSE100*	*150*	*23.4*
*FTSE250*	*209*	*32.7*
*Small Cap*	*144*	*22.5*
*Fledgling*	39	*6.1*
*AIM*	98	*15.3*
*Sum*	*640*	*100.0*

You were pretty close with the FTSE250 guesstimate.

But FTSE100 is much better represented than the guesstimate of 'less than 10%'.

Also, you'd expect there to be more FTSE250 representatives - there's more to choose from (250 vs 100) - if you weighted these values for the number of stocks in their index then the FTSE100 is much better represented than FTSE250.

i.e. case rate appears stronger for FTSE250 stocks but FTSE100 stocks have higher base rate for inclusion in the Guru Screens.

Mechanical Bull

Thanks WM - I went back to check my figures and it seems I made a stupid mistake. I used the number of FTSE100 stocks appearing in screens as the numerator instead of appearances. Your figures look about right.

Richard Goodwin

20th Aug '14

Thank you. This is am awesome article and great responses which all really add value. There's lots of food for thought here.

Mechanical Bull: A Riddle Solved

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