The WISE Model Proves Its Wisdom

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There’s been some buzz recently around Societe Generale SA (ADR) (OTCMKTS:SCGLY) (EPA:GLE)’s WISE model (Winning Investment Strategies in Equities), and looking at the model’s historical results shows why. Although it has only been used for about the last decade (since 2001 in Europe, 2007 in the US, and more recently elsewhere) a new paper from Societe Generale’s Global Quantitative Research division used backtesting to see how the model would have performed if it had been devised earlier, and it consistently beats markets, sometimes by staggering amounts.

WISE Europe stocks selection

WISE Europe chooses stocks with at least €3 billion in market capitalization from all developed European markets and then divides them into deciles according to a proprietary process that forms the core of the WISE model. The most attractive decile is used for the long portfolio and the least attractive is put into the short portfolio. The WISE US Large Cap works similarly, choosing stocks from the S&P 500 (INDEXSP:.INX) and dividing them into deciles in the same way. WISE Japan divides stocks in the Nikkei 225 Index into quintiles instead of deciles, but otherwise follows the same process.

The duration that each portfolio holds stocks varies considerably. WISE Europe Long and Short holds stocks for 12 months on average while WISE US Long holds stocks for an average of twelve months, but WISE US Short averages just six. WISE Japan, Long and Short, holds stock for just three months on average.

WISE west cumulative

WISE model extended to cover Asian markets

In 2011 the WISE model was extended to cover Korea, Taiwan, and Hong Kong, and its early success may be part of the reason why the model is becoming more popular. Each of these models takes the 200 largest stocks from South Korea, Taiwan, and Hong Kong respectively and then divides them into quintiles, putting the top quintile in long portfolio and the bottom into a short portfolio. These three newer models are more uniform then the original three, and all six portfolios hold stocks for two months on average.

WISE Asian markets

Going back to 1998 for each of these, the worst performer is WISE Europe which nearly tripled in value when the ISHARES STOXX 600 (EPA:SXP) essentially broke even. If you could go back 15 years and follow WISE Korea you’d see your investment increase almost 4000 percent, which is definitely something to get excited about.

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