Momentum Dominates In 2018: Half-Year Guru Strategies Review
Ben Hobson | Jul 27, 2018 16:05
2017 was a strong year for the 60 guru-inspired investment strategies tracked by Stockopedia - but they’ve come under pressure in the first half of 2018.
After last year’s benign market conditions, uncertainty set in during February and March. On reflection it barely registered as a correction, yet the sense of unease at the time was very real. It seems many investors, analysts and commentators are expecting a significant drop sooner rather than later - but what we got in February wasn’t it.
Last year it was growth and momentum that were the big investment style winners. Even value strategies started to fire again after a long spell on the sidelines. That was particularly driven by rising commodity prices pushing up the valuations of a lot of mining and energy stocks. From a market perspective, it was smaller shares and small-cap indices that led the way in 2017.
In 2018, some of those trends have continued. The Alternative Investment Market hit a new five-year high in June. Meanwhile, the index of the largest 100 AIM stocks rose by 17.5 percent during the first six months. AIM has historically been quite sensitive to investor confidence, so on the current evidence it appears that sentiment is still pretty upbeat.
We’re now in the seventh year of tracking the Guru Strategies in the UK, with slightly less history for Europe and the States. Over time, these models have become a useful way of seeing what’s working in the market, and how different styles react to different conditions.
Not only do they show what’s working, but they also show when trends start to change. They cover a range of approaches used by some of the world’s best known investors. Each one is classified under a specific style - ranging from Quality, Growth, Value, Bargain, Income and Momentum.
In terms of the mechanics, each strategy has its own set of rules, and we constantly screen the market for companies that meet them. At the end of each quarter, those passing the rules are held in a portfolio for each strategy, which we monitor. One word of warning though, is that the models aren’t always realistically investable, and sometimes there may not be many companies that meet the rules of some of them. In addition, we don’t account for the drag of trading costs or the bonus of dividend payments.
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How they performed...
Deep value Bargain strategies set the pace in terms of performance over the first six months of the year. Behind the scenes, there have been two or three ‘bargain basement’ shares that have really paid off for some of these strategies. Companies like Redx, Vernalis and Webis were big wins for screens like ‘Trading Below Cash’ (up 36 percent) and ‘Ben Graham Net Nets’ (up 14 percent).
To be fair, these kinds of big hits are what bargain strategies are all about, but those figures mask a lot of volatility in occasionally concentrated portfolios. Bargain investing tends to work better in falling or uncertain markets when prices can get out of whack. You could argue that these figures are being driven by a lot of speculative money in the market that’s chasing anything that sounds like good news.
Value
More generally, Value strategies have had a much tougher time in 2018, with 10 of the 16 screens that Stockopedia models losing money during the period. But stalwart value strategies like the ‘David Dreman Price to Cash Flow’ screen (up 14.6 percent) and the ‘Piotroski F-Score Price to Book’ screen (up 9.1 percent) still proved that there are pockets of value out there. The Dreman screen had some big successes with holdings like Plus500 (LON:PLUSP), Games Workshop (LON:GAW) and Bloomsbury Publishing (LON:BLPU).
Momentum
Given the continuing upward trend in index valuations it’s no surprise that the Momentum strategies had a good first-half. The ‘James O’Shaughnessy Tiny Titans’ screen (up 12 percent) set the pace. It looks for cheap stocks (on a price to sales basis) with strong price momentum and it’s been a stellar performer over the past seven years. In our lab conditions it has returned more than 300 percent. It did especially well in the first-half from owning stocks like Christie (LON:C3U), Fairfx (LON:FFX) and Lighthouse (LON:LGHT).
The ‘Price Momentum’ strategy (up 10 percent) also held up well during the first six months of the year, with ‘Bold Earnings Revisions’ (up 7.2 percent) and ‘Earnings Upgrade Momentum’ (up 5.9 percent) just behind it.
Growth
Among the Growth strategies, it was the ‘Jim Slater Zulu Principle’ screen (up 22 percent) that led the way in the first half. But while the headline result was impressive, it was done with just one big win - Elecosoft (LON:ELCO). In expensive markets the Zulu strategy always struggles to find opportunities, and that’s definitely the case at the moment. It has a record for finding super investments, but diversification can be a real problem at times.
Diversification isn’t such problem with the ‘Bill O’Neill Can-Slim’ model (up 8.8 percent), which overlooks price in favour of rapid earnings growth and momentum. That was followed by the ‘James O’Shaughnessy Cornerstone Growth’ strategy (up 7.8 percent). But other than that, it was the quietest period for growth strategies that we’ve seen for some time.
Quality
The muted performance of growth strategies was matched by the Quality screens, too. Here, most of the strategies lost ground during the first half of 2018, with the exception of ‘Joel Greenblatt’s Magic Formula’ (up 3.8 percent), which ranks stocks based on value and quality. The Magic Formula - based on Stockopedia’s modelling - has now been working well for the past two years.
What to expect on the second half…
The market dip in early 2018 set the tone for a much more sedate performance from the guru strategies than we saw last year. In particular, the growth strategies that did so well over the past 12 months have been pegged back. But that’s not to say it’s bad news. Markets go through periods of drifting and these strategies won’t perform spectacularly when that happens. But in each of the styles there have been strategies that have ground out positive results. It’s not unreasonable to think we’ll probably see more of the same over the rest of the year.
This content should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.
Disclaimer: This content should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.
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