2017 was a really profitable where any investment strategy of the 19 strategies we tracked would have given a great return.
World-wide the highest return was +32.6% and the lowest +16.1%.
Even more surprising you did not even have to buy cheap (undervalued) companies to get the return – just about all strategies worked.
In spite of holding around 60% cash, my portfolio was up +9.3% (+23.3% if you ignore the cash part of my portfolio) - a return I am very happy with because it was earned by not taking a lot of risk.
What has worked in 2017 – value is not dead
So what worked best world-wide in 2017?
Here is a short summary:
- Price to book worked VERY well +32.6% (who would have thought that)
- Value Composite 1 (+29.3%) and Value Composite 2 (29.1%) did very well
- Earnings Yield (EBIT to EV) did well up 28.5%
- Qi Value again did very well up 26.7%
- Mid-size market value companies did well, up 29.0%
- High dividend yield companies gave a respectable but one of the lowest return of 17.8%
- Value REALLY underperformed in the USA – and expensive low quality companies did great – if this is not a sign of an overheated market I do not know what is.
Before I show you the exact strategies and their returns first some information on what and how we calculated the returns.
What strategies we tested – on 7,000 companies worldwide
We looked at the performance of the following 19 investment strategies over the 12 month period from 1 January 2017 to 31 December 2017:
- Large vs small companies
- Book to Market value (inverse of price to book)
- Earnings yield (EBIT / EV)
- Qi Value ranking
- Price Index 6m (Current price / Price 6 months ago) also known as 6 months Momentum
- Price Index 12m (Current price / Price 12 months ago) also known as 12 months momentum
- VC 1 One also known as Value Composite One rank
- VC Two known as Value Composite Two rank (Value Composite One with an additional ratio: Shareholder Yield)
- ERP5 ranking (Ranking based on Price to Book, Earnings Yield, Return on invested capital (ROIC), 5 year average ROIC)
- Shareholders Yield (Dividend yield + Percentage of Shares Repurchased)
- Dividend Yield
- Dividend growth 5 years (The geometric average dividend per share growth rate over the past 5 years)
- MF Rank (Magic Formula Ranking)
- Piotroski F-Score
- Qi Liquidity ranking (Adjusted Profits / Yearly trading value)
- Gross Margin Novy Marx (gross profits / total assets)
- Free Cash Flow (FCF) Score (Calculated by combining Free cash flow growth with free cash flow stability)
- Adjusted slope average (125 day, 250 day) - momentum
- Adjusted slope (90 days) - momentum
Only companies worth more than $50 million
We excluded companies with a market value less than $50 million, to make sure that we only look at companies you can buy and sell easily.
Markets worldwide
We included markets worldwide because only when you look at markets worldwide can find the best companies that fit your investment strategy.
The following stock markets, grouped into regions, were included:
North American Markets
- USA
- Canada
European Markets
- All the Eurozone countries
- United Kingdom
- Switzerland
- Norway
- Denmark
- Sweden
Japanese Market
- Only Japan
Other Asian and Oceanic Markets
- Australia
- New Zealand
- Hong Kong
- Singapore
This gave us a list of about 7,000 companies.
All companies split into five groups – Quintile 1 the best
For each of the strategies on 1 January 2017 we divided all the companies into five 20% groups or quintiles.
Quintile 1 shows the companies that scored best in for all the strategies we tested - Quintile 5 the worse.
For example, Quintile 1 shows the return of the 20% of companies with the highest book to market ratio (lowest price to book – cheap companies) at the start of the year. And Quintile 5 shows the return of companies with the lowest book to market ratio (highest price to book ratio – expensive companies).
For Price Index 6m quintile 1 show companies with the best momentum (biggest share price increase over 6 months) and quintile 5 companies with the biggest price fall in the previous 6 months.
For the F Score quintile 1 shows the return of companies with the best Piotroski F-Score (9 or 8) and quintile 5 those with the worse F-Score.
For the size strategy quintile 1 shows the return of the 20% of companies with the biggest market value and quintile 5 the 20% smallest companies.
What worked world-wide?
The following table summarises how all 19 investment strategies performed world-wide:
Best performing strategies worldwide
Source: www.quant-investing.com
Click image to enlarge
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: 25.7%
- Maximum return of Quintile 1 strategies: 32.6%
- Minimum return of Quintile 1 strategies: 17.8%
What worked?
Here are the two best performing strategies:
- Undervalued high book to market (low price to book) companies +32.6%
- Undervalued Value composite 1 companies +29.3%
What did not work?
These were the worse strategies:
- Expensive companies with a high ERP5 score +16.1%
- Companies with a bad Price Index 6m (momentum) +16.3%
What worked in Europe?
Below is the performance of all 19 strategies in Europe:
Best performing strategies in Europe
Source: www.quant-investing.com
Click image to enlarge
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: 24.2%
- Maximum return of Quintile 1 strategies: 29.4%
- Minimum return of Quintile 1 strategies: 19.2%
What worked?
These were the best two strategies:
- High momentum companies selected using Adjusted slope 90d (90dm momentum) +29.4%
- Undervalued Shareholder Yield (Dividend yield + Percentage of Shares Repurchased) companies +29.0%
What did not work?
The two worse performing strategies were:
- Companies with weak one year share price momentum: +12.4%
- Companies with a bad Magic Formula Rank: +12.8%
What worked in North America?
Below is the performance of all 19 strategies in North America:
Best performing strategies in North America
Source: www.quant-investing.com
Click image to enlarge
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: 14.4%
- Maximum return of Quintile 1 strategies: 22.9%
- Minimum return of Quintile 1 strategies: 9.7%
What worked?
The two best performing strategies were:
- Expensive companies with the lowest dividend yield: +30.7%
- Bad quality companies with a low Gross Margin (Marx = gross profits / total assets): +28.9%
What did not work?
The two worse performing strategies were:
- Cheap companies with a good Qi Value score: +9.7%
- Cheap companies with a high dividend yield: +9.8%%
This was your best strategy in Japan
Below is the performance of all 19 strategies in Japan:
Best performing strategies in Japan
Source: www.quant-investing.com
Click image to enlarge
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: 40.3%
- Maximum return of Quintile 1 strategies: 46.4%
- Minimum return of Quintile 1 strategies: 26.0%
What worked?
The two best performing strategies were:
- Cheap companies with a good ERP5 score +46.4%
- The smallest 20% of companies in general +45.5%
What did not work?
The two worse performing strategies were:
- Expensive companies with a bad ERP5 ranking: +24.1%
- Expensive companies with a bad Magic Formula ranking: +25.6%
The 20% largest companies: +26.0%
What worked in Asia and Oceania Markets?
(Australia, New Zealand, Hong Kong and Singapore companies are included in this analysis)
Best performing strategies in Asia and Oceania
Source: www.quant-investing.com
Click image to enlarge
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: 21.0%
- Maximum return of Quintile 1 strategies: 26.6%
- Minimum return of Quintile 1 strategies: 12.9%
What worked?
The two best performing strategies were:
- Companies with the best 12 months Price Index (momentum): +26.6%
- Cheap companies with the best Value Composite Two ranking: +26.3%
What did not work?
The two worse performing strategies were:
- Expensive companies with a bad Value Composite Two ranking: -2.0%
- Expensive companies with a bad Value Composite One ranking: -0.9%
Returns all over the place – this is normal
As you can see no one strategy worked everywhere – sometimes exactly the opposite worked – this just proves that over a year anything is possible in the markets.
A quick warning
Please remember just because a strategy did well in 2017 does not mean it will continue to do so. As you can see the exact same strategy was the best in one region and also the worse in another region.
Jumping on the best performing strategy is most likely a bad idea - possibly a very bad idea. In fact your best strategy may be the worst performing strategy – this is not a recommendation.
Like you I also have no clue as to what strategy will work in the future - if someone says he does, he is lying.
If you want to see details of all the best investment strategies we have tested click here: Best investment strategies Quant Investing
Your performance tracking analyst
Wishing you profitable investing
PS To get this report on a daily basis as well as the tools to implement all 19 strategies (you can pay more for an inexpensive lunch for two) in your portfolio sign up here.
PPS It’s so easy to put things off, why not sign up right now?
Article by Tim du Toit, Quant Investing
