The Best Performing Value Investing Strategies Since 1989

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Value investing outperformed the S&P 500 as a whole for 2012, Value investing was the best performing Quantessential Style over the long term (since 89), says a report from Bank Of America Merril Lynch (BAML). For November, small size and Momentum were the best performing styles, while risk and dividend style underperformed last month. For 2012, till November, Quantessential Momentum was the best performing style.

The report from BAML believes that when the global economic cycle eventually troughs, major style rotation may once again catch investors by surprise as it has in previous cycles.

global style tilts

The seven Quantessential Styles from BAML is designed to track a particular investment style (Value, Growth, Growth, Risk, Momentum, Dividend, and small Size) and each Style is based on a combination of factors. Value, Growth, Dividend and Small Size Quantessential Styles consist of three factors each, Quantessential Quality and Risk consists of two factors each and Quantessential Momentum is based on a single factor, as can be seen in the above table. To arrive at a conclusion for each style, all possible single, double and triple combination of factors by averaging the Factor Ranks were created, and then the top quintile of stocks by the combined rank was found, and calculated the monthly-rebalanced performance.

The large liquid stocks included in this analysis are selected from the constituents of the MSCI AC World Index that meet the minimum criteria for market cap, turnover and coverage requirements.  As per the report, for a stock to be included in the analysis it must be in the largest 60% of stocks of the MSCI AC World Index by market cap, the largest 60% by average daily turnover in the last 6 months and last 20 days, and it must have a minimum of three consensus earnings estimates.

Quantessential style back testing results

Factor returns by style through 30 Nov 2012

Over the long term value investing strategies added 5.8 percent on average, closely followed by Momentum (5.0%).  Value style is made up of factors including, P/FCF, P/CFO, PE etc. P/PCF factor returned 9.8 percent year to date and 19.2 percent since inception, while EV/EBIT returned 10.8 percent year to date and 16.1 percent since inception. Both PE (forecast and trailing) returned an impressive 16 percent and 13 percent YTD respectively, and around 10 percent since inception. Some of the stocks included in the value style are Bank of China, Flextronics International Ltd. (NASDAQ:FLEX), Best Buy Co., Inc. (NYSE:BBY), Nissan Motor Co., Ltd.(PINK:NSANY) (TYO:7201) etc.





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