When the portfolios of Stockopedia’s 60 guru-inspired investment strategies were refreshed in June, the timing looked dreadful. The routine quarterly rebalancing came just a week after the EU referendum, when the portfolios were in the throes of serious volatility. Back then, few would have predicted the surging market comeback that we saw over the summer. But with indices now hitting 12-month highs, many of the strategies inspired by legends of finance have had a great quarter.
The timing of the last rebalancing (at the half-year) means it’s not easy to make a fair assessment of which strategies were most resilient to the volatility (seen in the FTSE All-Share chart below). That’s because the stocks in the portfolios were changed just as the market bottomed. But looking back over the past three months, it is possible to see which have bounced back strongest.
How the guru strategies performed
Before taking a look at how the guru screens got on in Q3, here’s a quick reminder about how they work and what the performance stats tell us. Since late 2011, we’ve been tracking the returns from a range of approaches used by some of the world’s best known investors. Each one is categorised as either Quality, Growth, Value, Bargain, Income or Momentum. They’re rebalanced quarterly to ensure that the shares in each portfolio meet the rules of each strategy as closely as possible. We don’t account for the drag of trading costs or the bonus of dividend payments.
These models aren’t always realistically investable. At times, there may be very few companies that meet the rules of some of them. And because there are no restrictions on company size, sector or index, there’s no obvious benchmark to compare them against.
|Index / Strategy Composite||Performance Q3 2016||9 Months to 30/09/16|
|FTSE 100||+ 6.1%||+ 10.5%|
|FTSE All Share||+ 6.8%||+ 9.0%|
|FTSE 250||+ 9.8%||+ 2.5%|
|FTSE SmallCap XIT||+ 11.9%||+ 5.0%|
|AIM 100||+ 16.3%||+ 11.6%|
|Guru Strategy Composite||+ 15.2%||+ 6.4%|
|Growth Composite||+ 18.6%||- 1.2%|
|Bargain Composite||+ 16.0%||+ 20.9%|
|Momentum Composite||+ 15.1%||+ 8.9%|
|Value Composite||+ 14.8%||+ 8.7%|
|Income Composite||+ 14.2%||+ 8.5%|
|Quality Composite||+ 11.9%||- 0.7%|
Growth strategies claw their way back
Growth strategies delivered some of the best performances in Q3. It was a strong turnaround from a dire spell in the second quarter, although they’re still underwater in 2016 overall. The biggest gain was in the Robbie Burns-inspired Naked Trader strategy, which pulled off a 36.4% return via big winners like IG Design and Charles Taylor. Other strong strategies included those based on the rules of Martin Zweig (+23.5%) and William O’Neil (+21.4%).
One of the common rules in growth strategies is that stocks need to be showing signs of price strength. In the case of the Naked Trader strategy, it’s as simple as looking for a positive percentage price change over one year. At the last rebalancing, rules like these were difficult for many shares to meet. That meant the number of companies qualifying for growth strategies suddenly dried up. With a general rebound in prices, the number of qualifying companies is now getting back to healthier levels.
Elsewhere, the Quality strategies also remain, in aggregate, in negative territory in 2016 despite positive returns across the board in Q3. One of the highlights here was a welcome bounce in the Screen of Screens, which was up 19% over the period. This strategy picks stocks that are qualifying for the highest number of other guru strategies. For instance, right now, the top names on the list are the housebuilders Persimmon and Bovis Homes, which both pass the rules for 10 guru screens.
Stockopedia’s modelling of Joel Greenblatt’s Magic Formula also saw a strong uptick over the past three months, rising by around 12%. That was driven by positions in the likes of iEnergizer, Brainjuicer and Air Partner.
Bargain strategies boosted by commodities
Bargain value strategies continued to do well during the past three months and now have a substantial overall lead this year, up 20.9%. Free Cash Flow Cows registered a 21.2% rise in the period, followed by the Ben Graham-inspired NCAV and Net Nets strategies, which saw gains of 18.5% and 17.8% respectively.
One of the main drivers behind the performance of the Bargain strategies in 2016 has been a pick-up in interest for small and micro-cap natural resources companies. Bargain strategies tend to attract deeply out-of-favour stocks and sectors, but they can also be an early indicator of changing trends in the market – and this could be what we’re seeing. Oil explorers and gold miners have dominated these screens in recent years as commodity prices slumped. But with the price of both gold and oil trending upwards this year, we’ve seen an associated pick up in prices in these sectors. Whether that continues remains to be seen.
At first glance, the Value strategies appear to have done well this year, particularly in the third quarter. The top performing screens were the Kenneth Fisher Prices to Sales (+29.8%), David Dreman Price to Book (22.9%) and the Piotroski F-Score Price to Book (+18.6%). Dig deeper though, and it’s clear that the strategies have struggled to find candidates in an environment that’s challenging for value hunters. In a quarter that saw a strong market performance, the stocks they picked did well, but some of the portfolios were very thin.
Momentum strategies lift off
Unsurprisingly, a number of Momentum screens did very well in Q3, although the timing of the last rebalancing didn’t help some of them. Among the winners was the James O’Shaughnessy-inspired Tiny Titans strategy. This has actually been one of the best overall performers for more than a year and racked up a 31% gain in the past three months. It’s a take on O’Shaughnessy’s extensive market research that blends low price-to-sales valuations with positive relative strength in small-cap stocks. That hit a sweet spot in the market, where high momentum small-caps have been soaring.
By contrast, the 52-Week Highs screen managed a more modest 5.8% gain in the quarter. Part of the problem here is that the last portfolio was formed at a moment when defensives and mining stocks were generally the only sectors hitting new highs. They’ve since drifted, and this screen paid the price. With momentum now powering ahead in the market, it could be that this screen sees a lot more action during the final three months of the year.
Finally, Income strategies saw a few changes among the top performers from earlier in the year. Screens that prioritise dividend growth and company quality took the lead, with Dividend Achievers (+17.3), PYAD (+17.1%) and Best Dividends (+14.4%) taking the top places. The popular Dividend Dogs strategy continued its strong run in 2016, with a 13.3% gain in Q3.
Outlook for 2016…
At the half-year, a lot of the guru screens were in turmoil as volatility set in. But since then, market indices have soared in value. In part that’s because equities appear to be seen as the least worst option for investors looking for returns in a low-rate environment. So contrary to concerns that the UK’s decision to leave the EU would cause immediate problems for stocks, we’re now looking at surging momentum and signs of stretched valuations.
Going into the fourth quarter, the guru strategies have got a US presidential election to contend with, as well as this new era of uncertainty for the UK economy. Overall, the gurus had a tough first six months in 2016, so the past 12 weeks have been a very welcome boost.