Quantitative Value Investing in Europe

Quantitative Value Investing in Europe

We published a brand new paper. Quantitative Value Investing in Europe: what works for achieving alpha.

In comparison with the USA there have been relatively few studies conducted on what works in investing in the European stock markets.  With this paper we would like to make a contribution and examine what factors led to excess returns in the European markets over the 12-year period from 13 June 1999 to 13 June 2011.

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The factors we tested were:

  • ·         Earnings yield,
  • ·         Free cash flow yield,
  • ·         Price-to-book
  • ·         Price-to-sales,
  • ·         Piotroski F-score
  • ·         Return on invested capital (ROIC)
  • ·         Return on assets (ROA)
  • ·         Net debt
  • ·         Relative strength / price index

We not only tested the historical value of the factors, but where it made sense, we also tested the 5-year average to see if it is a better indicator to use to generate market outperformance.  When we found a factor that showed strong out-performance we tested it together with other factors to see if two factors generate even more market outperformance.  In addition, we also tested two investment strategies, the MF and the ERP5 strategy, for their ability to outperform the market.  What we found mostly confirmed what other research studies found, but a few results were really astounding.

What if we told you we found a simple two factor method you can use to select investments that led to a 23.5% per year compound return (market was 2.25%) over the 12 years we tested?  That is a total return of 1157.5% compared with the 30.54% the market returned!

Available in online bookstores – ISBN:978-1-4710-9219-0. Subscribers to valuescreeners or the newsletter can download this new exciting paper worth 99€ for free! To download the paper, log in and navigate to the backtestspage.

Profitable Investing,

Philip Vanstraceele