Concluding my stock screen review at the end of last year, I alighted on a clear danger for performance in 2016: "if the fortunes of the resources sector reverse, which could be both sudden and pronounced, the relative lack of resources exposure could leave the screens floundering". Unfortunately, it seems I was on to something, because as resources stocks have rebounded extremely strongly, many of the screens have indeed struggled to keep up with the indices from which they are compiled. Indeed, in the year to date (to 6 December) less than a third (29 per cent) of the screens have outperformed the relevant indices. As I also pointed out last year, limited resources exposure will have benefited many of the screens' relative performance up until early 2016, so underperformance this year needs to be seen in the round.
Screen | Screen YTD | Index YTD | Index |
---|---|---|---|
Cash Magic | 30% | 11% | FTSE All Share |
Slater Small-caps | 29% | 10% | FTSE Small Cap/Aim |
High Yield Small Caps | 25% | 10% | FTSE Small Cap/Aim |
Strategy Screen | 25% | 11% | FTSE All Share |
O'Shaughnessy Value | 21% | 11% | FTSE 350 |
Greenblatt | 21% | 11% | FTSE All Share |
Greenblatt Top 10 | 17% | 11% | FTSE All Share |
Genuine Value Small Caps | 14% | 10% | FTSE Small Cap/Aim |
Genuine Growth | 12% | 11% | FTSE All Share |
High Quality Small Caps | 11% | 10% | FTSE Small Cap/Aim |
Piotroski | 11% | 11% | FTSE All Share |
Small Cap Special Sits | 5.0% | 10% | FTSE Small Cap/Aim |
Outperforming and Overlooked Its | 4.1% | 7.3% | S&P Global 1200 |
Safe Yields | 3.6% | 11% | FTSE All Share |
Cheap Small-caps | 1.7% | 10% | FTSE Small Cap/Aim |
Low Risk High Yield | 1.7% | 11% | FTSE All Share |
Great Expectations | -1.0% | 11% | FTSE 350 |
John Neff | -2.8% | 11% | FTSE All Share |
Top 5 Best of British | -3.0% | 11% | FTSE 350 |
Contrarian Value | -4.1% | 11% | FTSE All Share |
Zweig | -5.6% | 10% | FTSE Small Cap/Aim |
Have It All | -5.8% | 11% | FTSE All Share |
FCF Kings | -5.9% | 11% | FTSE All Share |
Contrarian Value Top 5 | -6.1% | 11% | FTSE All Share |
High Quality Large Caps | -7.2% | 11% | FTSE All Share |
Peter Lynch | -7.3% | 11% | FTSE All Share |
Monsters of Momentum | -8.2% | 11% | FTSE All Share |
Genuine Value | -8.5% | 11% | FTSE All Share |
O'Shaughnessy Growth | -9.1% | 11% | FTSE All Share |
Inflation Busters | -11% | 11% | FTSE 350 |
Best of British | -13% | 11% | FTSE 350 |
Late Bloomers | -13% | 11% | FTSE All Share |
Dreman | -17% | 11% | FTSE All Share |
Big Reliable | -26% | 11% | FTSE 350 |
Average | 2.3% | 11% | - |
The table includes all regular annually updated screens and excludes one-off thematic screens, the quarterly blue-chip momentum screen and five-year income screens
Source: Thomson Datastream
The relative lack of resources exposure was a feature of the screens in 2016 for two reasons. Firstly, I assess the screens' performance records on the basis of each screen representing an equally weighted portfolio of stocks. Indices, on the other hand, weigh performance according to the market cap of index constituents. Because the London market is home to many resources giants, this means the performance of a relatively small number of resources stocks tend to have a large effect on the index as a whole. This is less of an issue in the FTSE Small Cap and Alternative Investment Market (Aim) indices and it is interesting to note that many of the screens that did manage to outperform in 2016 focused on this part of the market.
The stark difference in fortune of the High Quality Large and Small Cap screens, which both use the same stock-selection criteria, can be seen to in part reflect this, although the role of luck in short-term outcomes should never be underestimated.
It is striking that only 32 per cent of the FTSE All-Share ex Investment Trusts index, based on the index's constituents at the start of 2016, have outperformed the 11.1 per cent total return achieved by the index itself in the year to date. Meanwhile the median (middle) return stands at just 0.8 per cent.
This is the first year we've had access to historic constituent data to break indices down in this way. Hopefully this will allow me to provide some insights next year on how the decline of resources stocks before 2016 skewed index returns in the oposite direction away from median return.
Changes afoot
The other reason for the underrepresentation of resources stocks in the screens is that screening techniques are not always well suited to spot a potential change in trend ahead of time. That's partly because many of the tests the screens use to try to find attractive stocks are backward looking (eg, earnings growth records) and resources stocks have looked horrid through the rear-view mirror for some time. In addition, the screens' most used forward-looking measure is broker forecasts, and these estimates of future earnings and sales are notoriously slow to respond to unfolding events. Many of the screens use price momentum to try to spot developing trends, but again, prices need to have started to move before this can prove useful.
The rebound in the resources sector is only one part of a broader narrative that is emerging about the changes afoot in the market at the moment. After a near-10-year period in which growth stocks outperformed value stocks, there are growing signs the situation may be reversing. While resources stocks do have a significant bearing on the performance of 'value', as measured by the MSCI World Value index, other 'value' sectors also seem to be seeing a change in fortune.
One of the most noteworthy examples at the moment is the financials sector. Stocks in the sector are benefiting from rising expectations that bond yields are establishing a sustained upward trend after 30 years of falls, which should help boost the sector's profitability. At the same time, areas of the market that have performed very well over several years, such as the so-called bond-proxy stocks judged to be a sustainable source of income, have derated substantially. This changeover in the market's winners and losers has been particularly pronounced since the US presidential election victory of Donald Trump.
Two screens from 2016 in particular look worth highlighting from this perspective. My annual 'strategy screen' attempts to look at what attractive fundamental factors (eg, low PEs, high RoEs, etc) are most prevalent for stocks that have performed strongly over the previous three months. A screen is then created based on those factors. The timing of the strategy screen this year meant its assessment of factors driving stock performance covered the period in which many commentators believe the market turned in favour of value (around February). Indeed, the strategy screen highlighted three classic 'value' factors as being the most attractive metrics to concoct a screen from. The screen especially highlighted the attractiveness of low price-to-book ratio, a metric popularised by 'the father of value investing', Benjamin Graham. The resulting selection of stocks included a number from the resources sector and the strategy screen has subsequently achieved very impressive outperformance, especially considering it is based on a fairly diverse portfolio.
At the other end of the spectrum we have my 'big reliable' screen (how ironic that name has proved in 2016, although it is not meant as a description of the screening criteria rather than expected performance). This is a screen that stands by the mantra 'quality will out' and ignores all questions related to valuation. This strategy had been quite successful prior to 2016, but it has come a cropper to such an extent that all past outperformance has been wiped out, with the screen now underperforming the index over every time period. Another screen that ignores the question of valuation is the Best of British screen, which has also done very badly, although Brexit was a key reason for the turn in performance here due to the screen's country-specific focus.
While this year, especially the latter half, does appear to have seen a move away from the themes of 'growth' and 'quality' by the market in favour of 'value', it may not be too early to start asking if some opportunities are being created by such a sharp sell-off in some parts of the market. Not only have some quality stocks corrected quite dramatically, but there are also grounds to ask whether 'inflation-adjusted' interest rates are really set to get all that high. Indeed, despite the emergence of the 'Trumpflation' narrative since the election of Donald Trump as US president, few expected the Fed to be anything but dovish in the way it increases rates.
Healthy correction?
There is another bit of context in which I think the underperformance of the screens over the past year should be seen. From when I began writing the screening column over five years ago up to late last year, the screen had substantially exceeded my expectations. I've been less inclined to think this is because the screens are better at producing outperformance than I had originally supposed, and have been more of the view that the first five years of this column has coincided with a time that has been unusually productive for screening techniques. Prior to 2016 the index construction looks to have been a clear tailwind for 'stock-pickers' looking to be compared against the weighted average.
From this perspective, I personally see 2016 as a period of healthy bloodletting and confirmation that screens, as useful as they are (and I think they are extremely useful), have clear limitations. Comfort can be taken from the fact that in the past screens that have performed badly for a year or two can often bounce back strongly - the Greenblatt screen looks a case in point for 2016, for example. However, there is no reason to think the general trend of underperformance in 2016 can't continue, and the issue of index weightings, which benefited the screens for a number of years, could well continue to be a headwind in 2017. That said, a number of screens, especially those that use value and momentum as a theme, are already benefiting from choosing more stocks in the sectors that are currently leading the pack; namely resources and to a lesser extent financials.
Meanwhile, the screens that have longer-term records, as shown in the three- and five-year tables below, still look good on the whole.
Three-year screen returns
Screen | Screen 3yr | Index 3yr | Index |
---|---|---|---|
Cash Magic | 66% | 13% | FTSE All Share |
High-yield small-caps | 64% | 21% | FTSE Small Cap/Aim |
Strategy screen | 56% | 13% | FTSE All Share |
Small-cap Special Sits | 47% | 10% | FTSE Small Cap/Aim |
Great Expectations | 43% | 13% | FTSE 350 |
John Neff | 43% | 13% | FTSE All Share |
O'Shaughnessy Value | 43% | 13% | FTSE 350 |
Top 5 Best of British | 42% | 13% | FTSE 350 |
High-quality small-caps | 38% | 11% | FTSE Small Cap/Aim |
Safe Yields | 37% | 13% | FTSE All Share |
High-quality large-caps | 35% | 13% | FTSE All Share |
Slater small-caps | 34% | 10% | FTSE Small Cap/Aim |
O'Shaughnessy Growth | 30% | 13% | FTSE All Share |
Monsters of Momentum | 29% | 17% | FTSE All Share |
Genuine Growth | 26% | 13% | FTSE All Share |
FCF Kings | 25% | 13% | FTSE All Share |
Genuine Value small-caps | 21% | 10% | FTSE Small Cap/Aim |
Have It All | 19% | 13% | FTSE All Share |
Low-risk high-yield | 19% | 13% | FTSE All Share |
Zweig | 18% | 11% | FTSE Small Cap/Aim |
Greenblatt | 16% | 13% | FTSE All Share |
Best of British | 16% | 13% | FTSE 350 |
Dreman | 11% | 13% | FTSE All Share |
Genuine Value | 8.7% | 13% | FTSE All Share |
Contrarian Value | 2.8% | 13% | FTSE All Share |
Greenblatt Top 10 | 1.8% | 13% | FTSE All Share |
Cheap small-caps | -1.8% | 10% | FTSE Small Cap/Aim |
Contrarian Value Top 5 | -3.3% | 13% | FTSE All Share |
Big Reliable | -4.1% | 13% | FTSE 350 |
Peter Lynch | -6.7% | 13% | FTSE All Share |
Inflation Busters | -10% | 13% | FTSE 350 |
Piotroski | -11% | 13% | FTSE All Share |
Average | 24% | 13% | - |
Five-year screen returns
Screen | Screen 5yr | Index 5yr | Index |
---|---|---|---|
Contrarian Value Top 5 | 235% | 54% | FTSE All Share |
Top 5 Best of British | 158% | 53% | FTSE 350 |
Monsters of Momentum | 139% | 54% | FTSE All Share |
High-quality large-caps | 135% | 54% | FTSE All Share |
Safe Yields | 121% | 54% | FTSE All Share |
Best of British | 107% | 53% | FTSE 350 |
Contrarian Value | 105% | 54% | FTSE All Share |
O'Shaughnessy Value | 102% | 53% | FTSE 350 |
Low-risk high-yield | 98% | 54% | FTSE All Share |
Greenblatt | 94% | 54% | FTSE All Share |
Greenblatt Top 10 | 45% | 54% | FTSE All Share |
Big Reliable | 31% | 53% | FTSE 350 |
Average | 114% | 53% | - |
Screen returns since inception
Screen | Screen since inception | Index since inception | Inception date | Index |
---|---|---|---|---|
Great Expectations | 195% | 59% | 19 December 2011 | FTSE 350 |
Top 5 Best of British | 167% | 58% | 13 October 2011 | FTSE 350 |
High-quality large-caps | 161% | 66% | 11 August 2011 | FTSE All Share |
John Neff | 160% | 50% | 30 January 2012 | FTSE All Share |
Contrarian Value Top 5 | 154% | 47% | 27 July 2011 | FTSE All Share |
High-yield small-caps | 144% | 48% | 20 November 2012 | FTSE Small Cap/Aim |
Monsters of Momentum | 138% | 51% | 4 November 2010 | FTSE All Share |
Have It All | 127% | 56% | 8 December 2011 | FTSE All Share |
O'Shaughnessy Growth | 125% | 44% | 13 February 2012 | FTSE All Share |
Low-risk high-yield | 123% | 47% | 28 March 2011 | FTSE All Share |
High-quality small-caps | 120% | 54% | 6 August 2012 | FTSE Small Cap/Aim |
Safe Yields | 119% | 46% | 12 July 2011 | FTSE All Share |
Cash Magic | 113% | 21% | 7 May 2013 | FTSE All Share |
Strategy Screen | 109% | 28% | 26 February 2013 | FTSE All Share |
Greenblatt | 102% | 48% | 25 January 2011 | FTSE All Share |
Genuine Growth | 102% | 41% | 12 November 2012 | FTSE All Share |
Best of British | 102% | 58% | 13 October 2011 | FTSE 350 |
Small-cap Special Sits | 101% | 32% | 8 April 2013 | FTSE Small Cap/Aim |
O'Shaughnessy Value | 89% | 43% | 14 February 2011 | FTSE 350 |
Zweig | 81% | 52% | 20 August 2012 | FTSE Small Cap/Aim |
Contrarian Value | 73% | 47% | 27 July 2011 | FTSE All Share |
Greenblatt Top 10 | 71% | 48% | 25 January 2011 | FTSE All Share |
Piotroski | 68% | 52% | 6 January 2012 | FTSE All Share |
Genuine value small-caps | 67% | 26% | 20 May 2013 | FTSE Small Cap/Aim |
Peter Lynch | 62% | 48% | 16 April 2012 | FTSE All Share |
Slater Small-caps | 57% | 30% | 18 June 2013 | FTSE Small Cap/Aim |
Dreman | 44% | 23% | 29 April 2013 | FTSE All Share |
Genuine Value | 43% | 25% | 5 March 2013 | FTSE All Share |
Inflation Busters | 40% | 46% | 26 January 2012 | FTSE 350 |
FCF Kings | 37% | 17% | 16 September 2013 | FTSE All Share |
Cheap small-caps | 34% | 29% | 19 March 2013 | FTSE Small Cap/Aim |
Big Reliable | 32% | 45% | 16 May 2011 | FTSE 350 |
Outperf. Overlooked ITs | 10% | 8.9% | 3 October 2014 | S&P Global 1200 |
Late Bloomers | 3.3% | 11% | 8 May 2014 | FTSE All-Share |
Average | 93% | 41% | - | - |
Source: Thomson Datastream