Stockranks performance chart showing all quintiles underperform the index!?

8th Jan '19 by Mark L.

24 comments 2092 reads

So probably I am mid-reading the performance graph, but anyway here goes...

I was playing around with Stockranks performance, especially momentum. Mainly curious to see how momentum has performed over the last year, which has been something of a bear market. But also interested how overall Stockranks perform in a downward market.

So I put into the performance chart a filter of market cap > £350M, split into quintiles and looked for a 1 year chart performance with annual rebalancing. Which presumably means the chart represents a buy and hold portfolio over a year.

Curiously, every quintile appears to underperform the index! Doesn't sound possible. Any clues as to what could be going on?

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About the Author

Mark L.

Premium Member

24 comments

DWit199

9th Jan '19

This is what I see

Are you seeing a different chart?

GrahamF

9th Jan '19

David, I think you have the time period on All rather than 1yr. The selection for that is on the left just above the chart.

JohnWigg

9th Jan '19

I've read something similar about the US market. The S&P500 is a weighted index, and therefore its largest constituents will affect its performance disproportionately. And until recently this has been the case: big tech has done the heavy lifting and many sectors have seen lacklustre performance.

In the caseof a weighted index, the median performer must underperform the index and if the top 20% of shares have really big MCaps, the bottom four quintiles must do as well.

So you seem to be using two incompatible measures, known technically as parametric (means, sds) and non-parametric (medians, percentiles).

DWit199

9th Jan '19

Thanks Graham. That explains it. Over one year the quintiles and ftse are quite bunched up, although even then the 0-20 Stockrank group show much worse performance than the rest.
It's also worth bearing in mind that Stockranks have always been much more effective with small caps and AIM than with larger companies.

There is a url hack revealed by Ed that you can do to break the charts down into sectors and/or market cap ranges. It's revealing to compare the 20-200 mkt cap range with the >350 selection

OK here's a couple of secrets.

Firstly - You can hack the url to generate these sector reports. Each sector has a code between 50 and 59. You can add ?code=50 to any URL in the performance section and generate the charts yourself. The codes are 50 Energy, 51 Basic Materials, 52 Industrials, 53 Consumer Cyclicals, 54 Consumer Defensives, 55 Financials, 56 Healthcare, 57 Technology, 58 Telecoms, 59 Utilities.

Secondly - You can hack the market cap range too. by adding ?cap=10-49

Gromley

9th Jan '19

Yes the one year chart does indeed show this effect.

As Brigra suggests - market cap weighting vs equal weighting is the key factor at play here.

Essentially this chart is showing that an equal weighted portfolio of everything (eg £1 invested in each stock) underperformed a market cap weighted portfolio. Ergo, the very largest stocks tended to over-perform.

Aside from the forex factors mentioned by Brigra, there are couple of structural reasons why this is likely :

Large caps are generally considered 'safer' than small caps.

The share price of large caps is far less influenced by 'flighty retail investors' than small caps.

I disagree however with the view that factor investing 'had a holiday' in 2018 or doesn't really work in a downturn. If you look at all of the chart variants there is a clear tendency that the higher stock rank categories outperformed the lower and that is the persistent effect of the factors.

I think it is a fallacy to expect StockRanks / factor investing to immunise one against downturns. 'Everything' (poetic license) is effected by a downturn.

As an interesting (to me anyway) aside, that there is an oddity in filtering for market cap > £350m and using the stock ranks. This selects somewhere in the region of the 500 very largest stocks. Low StockRanks (<20) are significantly under-represented in this group, probably making up less than 5% of the group as opposed to 20% across the whole market.

This explains the odd performance of the 0-20 line in the chart above. There were probably only 10-20 stocks in this grouping. It looks as though 1 or 2 of these performed very well over the first half year. There is a sharp drop on the 24-July (c.10%) and I would surmise that this was driven probably by a single stock falling like a stone (perhaps to zero?)

Off the top of my head I cannot think what that stock would be, but it would be interesting to see if that really is the case.

DWit199

9th Jan '19

This is the 20-200 mkt cap comparison. It says >350 but the 350 in the url was replaced by 20-200 to give this chart.

Rusty2

9th Jan '19

I looked at the 0-10 band >350m and it outperforms everything else, anyone know which stock/s it is, it's +95% in the last 6 months. The problem is every quarter these shares change, if it does rise I would expect it's SR to rise also. If you rebalance annually the 0-10 band is -86%. Semi-annually is similar.

Nick Ray

9th Jan '19

It might be SolGold (LON:SOLG) (was stock rank 8 back in January 2018)

Rusty2

9th Jan '19

It's possible, I don't have the July SR. Don't think it went up 95% either.

Gromley

9th Jan '19

Having just had a look at the charts I'm certain SolGold (LON:SOLG) drove the increase in >£350M 0-10 Quarterly in September (and it would have qualified). It was probably rebalanced out in October (If you've I mind to you could probably compare the two charts and work out precisely when the rebalancing was done).

Rusty2

9th Jan '19

Maybe but I would have expected the high quality stocks to hold up better than the lower quality ones. This does not seem to be the case in the last 6 months which is when the market has fallen the most.

Rusty2

9th Jan '19

Not sure, there was a big increase in the 0-10 band at end of May/early June which would not have been SolGold (LON:SOLG). Maybe there were several miners ranked 0-10 around that time. As market has fallen gold has gone up in price.

Gromley

9th Jan '19

Guessing that the rebalancing might be 1-Jan,1-Apr etc. then there may as you say have been more than one qualifier at that time, but Jul-Sep looks definitely to be just SolGold (LON:SOLG).

Nick Ray

9th Jan '19

Other possibilities for stocks > £350M which had a stock rank < 10 during 2018 and for some part of 2018 were rising strongly (even if they later fell) are Oxford BioMedica (LON:OXB) Energean Oil & Gas (LON:ENOG) Sirius Minerals (LON:SXX)

Rusty2

9th Jan '19

Oxford BioMedica (LON:OXB) would account for some of the rise at the end of May. Energean Oil & Gas (LON:ENOG) was that below 10? Sirius Minerals (LON:SXX) ranking seems to high.

Rusty2

9th Jan '19

Oxford BioMedica (LON:OXB) as well?

Nick Ray

9th Jan '19

You are right. I was a bit lazy in doing the scan. Oxford BioMedica (LON:OXB) and Sirius Minerals (LON:SXX) went to 10 in 2019 not 2018.

Energean Oil & Gas (LON:ENOG) did drop below 10 early in 2018 though (see pink dotted line):

Rusty2

9th Jan '19

Nick, thanks, where do you get information from?

Nick Ray

9th Jan '19

I grab some data from the site roughly every two weeks for stocks I am interested in. If you had asked the same question about stocks < £100M I couldn't tell you!

There is so much good info on the site that it is a shame it is so hard to do some basic requests, like "which stocks met which criteria at some point in the past."

Mark L.

10th Jan '19

Yes, I was looking at a 1 year chart.

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Stockranks performance chart showing all quintiles underperform the index!?

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Mark L.

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