Quarterly Strategies Review: Growth strategies resist volatile markets

One of the long-term endeavours at Stockopedia is to model the strategies devised by some of the world’s greatest investors. Among the fascinating aspects of the quarterly rebalancing and tracking of those strategy portfolios is to see how they fare when markets take a tumble. Needless to say, given the pull-back in August, the 60-plus strategies inspired by the legends of finance had a rocky ride during the third quarter. But it wasn’t all bad news...

Most strategy styles - including quality, value, growth and momentum - notched up reasonable gains during the first half of the year. Among the highlights after six months, the composite return for the Quality strategies was 12.3%, and for the Growth strategies it was 10.9%. At that stage the FTSE SmallCap index (excluding investment trusts) was ticking along well, up by 10.2%, and the FTSE All Share was up by a more modest 1.0%.

Investors lose confidence

But it was all change in Q3. A short, sharp pull back in market valuations left the FTSE 100 down by more than 7.0% for the quarter. The FTSE All Share fell by 6.6% and the FTSE SmallCap XIT fell by 2.4%.

Naturally, this correction had an impact on the gurus. The Stockopedia Composite Long - which aggregates all the strategies - ended the quarter down by 5.2%, but remains up by 3.3% year to date. But based on investment styles, it was only the Growth strategies that managed a positive return. Their aggregate gain was 2.7%.

Growth strategies also lead the way in the year to date, with an overall gain of 14.9%. That’s followed by Momentum and Quality strategies, which are both up 8.5%.

In Europe in the year to date, the Stockopedia Composite Long is up 4.8% versus 0.5% for the FTSEurofirst 300. In the United States, the long-only guru strategies lag the S&P 500, down -8.7% versus -6.7%.

Growth strategies bounce back

One of the standout features of the Q3 market turmoil was the resilience of smaller companies. It was reflected in the robust performance of the FTSE SmallCap XIT. Arguably, this trend is a good part of the reason why Growth strategies outperformed during the period - given that they’re heavily weighted to smaller stocks.

Leading the pack was the Jim Slater Zulu Principle screen, which returned 12.8% during the period. It saw some strong performances across the portfolio, including manufacturing group HellermannTyton, which agreed a takeover approach at the end of July. Other strong gains were seen by online casino and betting firm 32Red, commercial telecoms company Adept Telecom and information assurance consultancy, NCC.

Elsewhere among the Growth strategies, the Robbie Burns-inspired Naked Trader screen finished the quarter up 5.7%. It was boosted by positions in companies like gaming company Rank Group and engineering products business Alumasc. That was followed by James O’Shaughnessy Cornerstone Growth. It gained 5% over three months, helped by holding stocks like Gamma Communications and JD Sports & Fashion.

Quality & Momentum strategies hold up

Quality and Momentum strategies enjoyed mixed fortunes through Q3. The Warren Buffett-inspired Buffett - Hagstrom screen was the only quality-focused strategy to produce a positive return, up 4.7%. Its strongest performing positions included insurance businesses Beazley, Hiscox and Lancashire Holdings.

Momentum strategies did rather better, with the James O’Shaughnessy small-cap focused Tiny Titans screen up by 7.6%. Among the strongest holdings there was staffing group Empresaria, Finsbury Food and Penna Consulting. Tiny Titans was followed by the 52 Week High Momentum screen, which gained 4.7% and the Price Momentum screen, which gained 3.2%.

On an aggregate basis, the Value strategies tracked by Stockopedia saw a negative return of -8.9 in the third quarter, taking the underperformance in the year to date to -1.3%. A trend of rising market prices over the past 12 months has dramatically dried the pool of buy candidates for many value strategies. Over the past quarter, one of the most realistically ‘investable’ portfolios was driven by the David Dreman Low PE screen. It returned 1.5% with strong performances from stocks including Safestyle UK, insurance services consultancy, Charles Taylor and Dragon Oil.

A slow end to the year?

After a reasonably strong start to the year, the guru strategies were shaken up during the third quarter. One of the noteworthy elements of the market correction was the ability of smaller - and arguably more UK-focused - companies to resist wavering confidence elsewhere in the market, particularly in larger stocks. On this evidence it seems that the smaller end of the market could be the most exciting place to be during the final three months of the year.