Quarterly Update - The QVM Portfolio

9th Dec '15 by Tom Firth

7 comments 10379 reads

From mid-August this year, I’ve been running a little paper portfolio using the StockRanks as an experiment. I threw it together out of curiosity at first, not putting much work into it and the whole process taking no more than about 15 minutes. I have been pleasantly surprised by it all so far though so I thought I’d share the progress and my thoughts to date.

The process…

First off, I will outline the strategy itself and a few details as to how the portfolio is constructed etc. Sadly, I have played with the screen a little since formation date so can’t remember the exact criteria used but, roughly, they were as follows:

StockRank over 90 (that’s the QVM part!)
EV/EBITDA > 60% of the sector (to satisfy my bias towards value)
Dividend yield > 60% of the sector (who doesn’t like a little income?)
Piotroski F-score >=7 (to angle towards fundamental momentum)
Market cap > £10m (to avoid the real tiddlers)
Market cap < £1000m (to avoid those sluggish large caps)

That’s about it, my apologies if it’s not 100% accurate but it was something very close to that. I realised, in retrospect, that some of these criteria are unnecessary really, for example the EV/EBITDA and dividend yield requirements. All of this is already covered in the StockRanks and by putting the extra criteria in it probably just weighted the portfolio towards these couple of factors rather than ensuring a balanced exposure to a range of them.

From a portfolio management perspective, I decided that I would simply rebalance once a quarter (though I was a little late due to being very busy with work) and that I would include a £12.50 commission on every purchase and sale, as well as charging 0.5% SDRT for stocks with a full listing. Additionally, I chose to account for dividends, simply by making a note of the portfolio yield at each rebalancing date (around 2.2% at the start) and depositing cash equal to 25% of that at the end of the quarter. The portfolio started with a notional £1m, equally weighted across all stocks selected, with 25 stocks being the arbitrary number of companies chosen. To choose my 25 from the screen, I simply filtered by StockRank (I think…sorry if I am misremembering) and chose the 25 highest.

The performance…

I’ve actually been quite surprised by the performance – in a pleasant way! The portfolio formation date was…

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Rusty2

9th Dec '15

Had a quick look. Yes 5% is a good result, my NAP which started in June is only +2.5%. Maybe I need to incorporate the Piotroski F-score into my selections? Re Elektron Technology (LON:EKT) I did not think it paid dividends?

Tom Firth

To be honest I think the precise return is a little random over so short a time frame so I wouldn't be rushing to change methodology just because of this! I do like the F-score though, not so much as a strategy in and of itself but because of Piotroski's finding that it could help to shift the whole distribution of returns to the right. This is further built on by the guys at Alpha Architect in their book Quantitative Value where they found it to be a statistically useful addition to a QV systematic strategy.

That said I've see a post here on Stockopedia fairly recently (though I can't remember where precisely), where the poster had found through their own research that the F-score did not result in historical outperformance in UK markets. I seem to remember this was a test of a pure F-score strategy however so I wouldn't necessarily take that as evidence that it provides no value as part of a broader strategy. Worth investigating further anyway in my view.

Re the dividends - yes you're right some of those stocks don't pay dividends, I was just accounting for them in a lazy way as I didn't want to look up dividend rates for each stock and input them manually. Instead I just took the average yield across the whole portfolio at the start (2.2%), and deposited cash equal to 25% of that to reflect that only a quarter has passed since formation.

So: 2.2% * £1,000,000 gives £22,000 in dividends, divided by 4 gives £5,500 that has been deposited. I know this is just a proxy but over time it should balance out to be fairly reflective of reality.

Tom

Yes you are right 3 months is too soon to draw any firm concussions, I had a quick look at my NAP and the only low (5) F scores were Finsbury Food (LON:FIF), and Dee Valley (LON:DVW), and they have done quite well. The 2 highest Epwin (LON:EPWN) and Animalcare (LON:ANCR) have not done much, so the low F scores beat the high ones. My NAP does not include dividends that is part of the difference, divis are over 3% as I have a few high ones like City of London Investment (LON:CLIG), nor does it inc. fees but it does inc. the wide Stockopedia spread, really trading well within that in real life. Mind you you may have problems trading £40k in some of those stocks.

Yes excellent point - perhaps I should have just knocked a 0 off the opening balance and the results would be about the same but the ~£4k position sizes being a little more realistic. I did think at some point (but clearly forgot about it while rebalancing) that the £10m minimum market cap was too low for a £1m portfolio. I will move it higher next time.

Interesting what you say about your low F-scores doing the best! It shouldn't be a surprise given the concept is only really relevant when discussing broad selections of stocks, but the human brain just isn't wired up to accept that too easily...mine certainly doesn't seem to be anyway. I guess that's part of why these strategies appear to persist over time.

Tom

I not convinced about F scores so I will probably disregard that for now. What is clear is timing is everything, my top performer is Adept Telecom (LON:ADT) up 43%, in yours its down 8%. This is a problem I have with these selections and to a certain extent Stockopedia ratings. I think Ed's NAPS last January timed the selections exceptionally well, certainly since June I have not got anything like that. I have found 1 or 2 shares do very well and the rest cancel each other out. Like you I have about 50% win/lose.

vaticinator

Don't forget the Q part of QVM heavily weights the F-score already, to quote the 'What is the QualityRank?' page "We heavily weight the F-Score given it's effectiveness, especially amongst small caps.". I think that by adding extra criteria to the QVM you may be duplicating some of its filters.

Absolutely - this was part of my conclusion and it's been removed from the updated rules. Had I thought a little harder at the start I probably would never have stuck it in in the first place. Thanks for your feedback though.

Tom

Quarterly Update - the QVM portfolio

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Tom Firth

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