Having devoted much of last week’s column to the subject of how unpredictable the returns from good investment strategies can be and pondering the recent decade of against-trend, underperformance by 'value', it is perhaps fitting that this week I’m reviewing a value screen and it has underperformed by some margin over the past 12 months. The screen in question is based on the approach of famed American contrarian investor David Dreman. Ironically, when I ran the screen last year, it had also underperformed despite a generic value style (as represented by the MSCI World Value Index) having had a decent year. The prevailing trend of underperformance by value has since re-established itself.
Despite the screen performing poorly in the 12 months to June 2017, as well as turning in a poor return in the past year (see table), it has produced a slight outperformance of the FTSE All-Share based on its cumulative total return since I first ran it in 2013 (54.3 per cent versus 50.7 per cent – see chart). However, due to dealing costs, if a strategy is to earn its keep in the real world, it has to do a lot better than slightly outperforming the index. Indeed, if I factor in an annual 1.5 per cent charge to reflect notional dealing costs, the screen has produced a total return of 43.1 per cent. That’s some way below what one would expect from a low-cost index fund. However, the screen has at least produced some interesting ideas for further research along the way.
2017 performance