Integrated Value, Growth & Quality Portfolios

Searching for Cheap, Fast Growing and High Quality Stocks.

November 2017. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Integrated Value, Growth & Quality portfolios generated attractive returns year-to-date 2017
  • Sorting stocks on several characteristics results in relatively smooth performance
  • Mitigates the issue of factor timing, but not of factor selection

INTRODUCTION

Year-to-date 2017 is shaping up as a terrible year for the consensus trade of the beginning of the year – Value, which was based on animal spirits awoken by the Trump election in the US and a general recovery of the global economy. The winning factors of this year are Growth and Quality, which were deeply out of favour at the end of last year. Factor timing is likely impossible, but would an investor have been more successful by ranking stocks on Value, Growth and Quality characteristics simultaneously? In this short research note we will analyse the performance of three integrated portfolios: Value & Growth, Value & Quality and Value & Growth & Quality.

METHODOLOGY

We focus on the Value, Growth and Quality factors in the US, Europe and Japan. Value is defined as a combination of book-to-market and price-to-earnings multiples, Growth as a combination of the three-year sales and earnings per share growth, and Quality as a combination of return-on-equity and debt-over-equity. The portfolios are created by ranking stocks on multiple characteristics, i.e. selecting the stocks that rank highest on average for all three factors, and constructed as beta-neutral long-short portfolios by taking the top and bottom 10% of the stock universes. The analysis covers the period from 2002 to 2017 and includes costs of 10 bps per transaction.

VALUE, GROWTH & QUALITY INTEGRATED PORTFOLIOS IN THE US

The chart below shows the performance of the single Value, Growth and Quality factors in the US since 2002. We can observe that Value had a strong performance from 2002 to 2006 and muted returns thereafter. Interestingly Growth and Quality have been highly correlated over the last 10 years and investors might be cautious of loading up on similar factor exposure (read Factors: Correlation Check).