Strategies Review 2019: Gurus deliver solid gains as markets recover

This time last year, UK investors were reeling from a difficult end to 2018. Tumbling equity prices in the final quarter had taken the FTSE All-Share to a two-year low. Growth and momentum strategies were notable losers and we were left wondering whether they’d finally run out of steam after more than a decade of powering market returns.

Fast forward 12 months - to the start of 2020 - and the jury is still out on whether the UK momentum trade is fading. Index prices bottomed-out as 2019 got under way and the market did reasonably well in a pretty unsettling political and economic climate. Overall, it turned out to be a solid year for the 60 guru-inspired investment strategies tracked by Stockopedia. And unlike previous years, we saw much more even set of average performance results across styles spanning Value, Growth, Quality and Income.

Indeed, the UK general election in mid-December (resulting in a large Conservative majority) paved the way for an uptick in gains right across these major styles - laying the foundations for a strong Santa Rally.

About the Guru Strategies

2019 was the eighth full year of Stockopedia tracking the Guru Strategies in the UK, with slightly less performance history for Europe and the United States. Over time, these models have been an interesting gauge of what’s working in the market and how different styles perform in different market conditions.

The models not only show what’s working but they’re also an early indicator of changing market trends. Through the lens of of the gurus, we get to see how different styles of investing - spanning Quality, Growth, Value, Bargain, Income and Momentum - interact with each other.

In terms of the mechanics of Stockopedia’s Guru Strategies, each one has its own set of rules, and we constantly screen the market for companies that meet them. At the end of each quarter, those passing the rules are held in a portfolio for each strategy, which we track. In reality, the models aren’t always realistically investable, and sometimes there may not be many companies that meet their rules. In addition, we don’t account for the drag of trading costs or the bonus of dividend payments in the performance data.

What we saw from the gurus in 2019

Eight years of performance data captures a good deal of the post-financial crisis boom in equity prices. In that time, growth and momentum strategies have been the dominant sources of outperformance compared to value, quality and income strategies, which haven’t done quite as well. This chart tells that story:

Value investors will note the sharp rise in the green line (on the above chart) towards the end of 2019. After a decade of under-performance, is this the long-awaited return of value as an in-form investing ‘style’? This has been the subject of intense debate on both sides of the Atlantic over the past year - and something we’ll be watching closely in 2020.

Value strategies bounce back

On a one-year basis (chart below) the deep value “bargain screens” (blue line) appear to have done well. These include famous value-focused strategies like Ben Graham Net Nets and Ben Graham NCAV. Often, these types of Bargain screens become heavily populated with highly speculative micro-cap shares, which would terrify most investors. But in other cases, such as the Charles Kirkpatrick Bargain screen and Free Cash Flow Cows screens, there were some undeniably solid gains in much larger and more diverse ‘value’ stocks. As a general note, though, the Bargain screens need careful handling.

Bargain strategies aside, most of the other styles achieved aggregate gains of over 20% except momentum, which has lagged the index with an 12.9% return.

VALUE - In general, value tends to be be a style that flourishes when equities have suffered a period of underperformance. In strong markets, value struggles to perform against growth and momentum - and this has essentially been the story of the past decade.

However, value strategies kept up the pace as the UK market rallied in the latter part of 2019. In fairness, the best performing screens - like the John Neff, Bill Miller and Josef Piotroski F-Score Price To Book Value screens - have been either tightly concentrated or dominated by more speculative small-cap stocks. Even so, there were signs that a number of shares passing the ‘value’ test performed strongly in 2019.

GROWTH - On an aggregate basis, the guru-inspired growth strategies delivered the same overall performance as the value strategies did last year - at 24 percent. To a large extent, most of the big gains by the growth strategies came in the fourth quarter of the year - suggesting that the market turned much more bullish late on.

The top performing screens for the year were Growth at a Reasonable Price and T Rowe Price followed by the ever-popular William O’Neil Can-Slim-esque and Jim Slater Zulu Principle - all of which delivered returns of 30 percent-plus

QUALITY - Guru strategies that target the market’s higher quality companies had a hard time in 2018 but bounced back sharply last year. These strategies tend to focus on solid profitability and efficiency measures and leading the pack by a distance were two Warren Buffet inspired screens: Buffettology-esque Sustainable Growth and Buffettology-esque Historical Growth, which both served up 40 percent gains.

Stockopedia’s Screen of Screens - our blended investment approach that picks stocks appearing most frequently across all the Guru Screens - finished the year up 35 percent.

INCOME - Among the income strategies, the Geraldine Weiss Lite and Best Dividends screens came in top, with capital gains of around 30 percent in 2019. They were followed by Quality Income and Dividend Achievers, both on around 24 percent.

MOMENTUM - Overall, momentum strategies finished the year well off the pace, underperforming all the other styles and the index. The Josef Lakonishok screen, which blends price and earnings momentum to find stocks on the move, returned just over 20 percent during the year, as did the small-cap momentum strategy, James O’Shaughnessy Tiny Titans. Meanwhile, the popular 52 Week Highs and Earnings Surprise screens both failed to break double figure percentage returns.

What to expect in 2020?

2019 was a solid year for the Guru Strategies, helped by upbeat market conditions and a post-election surge towards the end of the year. In terms of styles, growth and value finished the year even, suggesting that the market cooled in its enthusiasm for go-go growth and turned increasingly towards potentially underpriced value shares as a source of returns. Meanwhile, momentum delivered the most disappointing results. After coming under severe pressure during the market pullback in the final quarter of 2018, momentum strategies failed to fire again in 2019.

Can momentum pick up the pace in 2020? And will value continue to pay off? If, as some commentators have suggested, the UK looks cheap both to domestic and international investors, then signs of progress on Brexit and an associated EU trade deal could make UK shares increasingly attractive. But economic uncertainties still abound. So while the gurus start 2020 in good form, there are still risks out there.