They say that good things come to those who wait, and that has certainly been the case with the O'Shaughnessy Value screen, which I first ran in 2011. After two rather disappointing years when I first ran the screen, both 2013 and 2014 have been strong, with the most recent 12-month period producing a 10.7 per cent total return from the 25 stocks selected compared with 5.3 per cent from the FTSE 350 (see table).
LAST YEAR'S PERFORMANCE
| Name | TIDM | Total return (19 Feb 2014 - 17 Feb 2015) |
|---|---|---|
| Catlin | CGL | 35% |
| Imperial Tobacco | IMT | 33% |
| Inmarsat | ISAT | 33% |
| Pearson | PSON | 29% |
| British Land | BLND | 25% |
| Icap | IAP | 24% |
| Amlin | AML | 23% |
| Old Mutual | OML | 23% |
| British American Tobacco | BATS | 22% |
| Aviva | AV. | 21% |
| Friends Life | FLG | 20% |
| SSE | SSE | 18% |
| Severn Trent | SVT | 18% |
| AstraZeneca | AZN | 16% |
| National Grid | NG. | 12% |
| Cable & Wireless Comms | CWC | 5.7% |
| Admiral | ADM | 4.5% |
| Tullet Prebon | TLPR | 3.8% |
| UBM | UBM | 1.8% |
| GlaxoSmithKline | GSK | -3.6% |
| Centrica | CNA | -6.2% |
| Ladbrokes | LAD | -14% |
| Electrocomponents | ECOM | -16% |
| FirstGroup | FGP | -24% |
| Vedanta Resources | VED | -38% |
| FTSE 350 | 5.3% | |
| Average | 11% |
Source: Thomson Datastream
The screen itself is not designed to produce stunning results. James O'Shaughnessy, a quantitative analysis supremo and author of the 1996 investment classic What Works on Wall Street, devised his value screen to produce decent outperformance while mimicking the same level of risk as investing in an index fund. My experiment with the screen has so far broadly accomplished this objective as can be seen from the cumulative performance graph. Since I started running the screen, the cumulative total return stands at 50.8 per cent, compared with 35 per cent from the FTSE 350. Add in a 1 per cent annual charge for dealing costs, and the cumulative return drops to 44.9 per cent.
On a buy-and-hold basis, the results from all four screens also seem to broadly meet Mr O'Shaughnessy's objective (see table). Even the 2011 screen, which underperformed the market in its first year, is now showing a good level of outperformance of the market. Buying and holding the 2011 O'Shaughnessy Value stocks would have by now produced a total return that is superior to the cumulative total return from switching between portfolios adjusted for the proxy 1 per cent annual charge.
O'SHAUGHNESSY VALUE BUY-AND-HOLD PERFORMANCE
| Start date - present | FTSE 350 total return | O'Shaughnessy Value total return | FTSE 350 annualised total return | O'Shaughnessy Value annualised total return | Annualised outperformance |
|---|---|---|---|---|---|
| 15-Feb-11 | 35.0% | 47.1% | 7.8% | 10.1% | 2.2% |
| 23-Jan-12 | 39.1% | 66.2% | 11.6% | 18.5% | 6.1% |
| 20-Feb-13 | 18.0% | 32.7% | 8.6% | 15.2% | 6.0% |
| 19-Feb-14 | 5.3% | 10.7% | 5.3% | 10.7% | 5.1% |
| Cumulative | 35.0% | 50.8% | 7.8% | 10.8% | 2.8% |
Source: Thomson Datastream
Some of the reason for the screen's success can perhaps be put down to its focus on dividends and the market's ongoing hunt for yield. In fact, dividend yield is the only valuation criteria this screen focuses on. Mr O'Shaughnessy's US-focused version of the screen looks at the 50 highest-yielding stocks that pass the screen's other test. However, my UK version focuses on the 25 highest-yielding shares. The screen's other test is that stocks must be 'market leaders'. The criteria for what constitutes a market leader are listed below. But the screen's key concern is to focus on large companies with highly liquid shares. Mr O'Shaughnessy determined the importance of these market-leading attributes through extensive back-testing.
MARKET LEADER CRITERIA
■ A market value of over $1bn. We've set the market value minimum at £500m. ■ More shares outstanding than the average (our averages are based on the mean average of stocks from the FTSE All-Share and FTSE Aim All-Share). ■ Higher than average cash flow per share. ■ Turnover of 1.5 times the average or more. |
The five highest-yielding stocks from the screen are given a write-up below with the remaining 20 detailed in the table that follows.
