- Value wins in 2020 – yes really!
- Average screen returns 7.4 per cent over 12 months, outperformance of 6.8 per cent
- Three quarters of screen have outperformed over the year
- Indices have been doing crazy things and the headline numbers are deceptive
It’s been a crazy 12 months for markets. UK stocks began the period strongly, having rallied hard when a first-phase Brexit deal was announced in late 2019. However, soon after coronavirus and lockdown hit. Markets crashed. In particular, the shares of many cyclical companies were smashed. Growth plays were quick to recover and go on to hit new highs. But unloved corners of the market had to wait until November and news of positive vaccine developments to stage their own revival; sharper but more limited than that of growth plays. But recent weeks have once again brought Brexit angst and markets are jittery.
Against this roller-coaster backdrop, the strategies I monitor in the Investors Chronicle stock screening column have done pretty well. The average total return in the 12 months to 4 December stands at 7.4 per cent and average index outperformance was 6.8 per cent. Meanwhile, almost three quarters of the screens (73 per cent) outperformed their benchmarks on a total return basis.
The longer-term picture is better. The average compound annual total return from the screens since each started stands at 11.6 per cent. Average compound annual outperformance is 7.3 per cent. What’s more, on this long-term view, only one screen has underperformed the index – the Genuine Value screen. And in its case, it has only underperformed by 0.1 per cent. That said, unlike my weekly screen reviews, this annual review does not attempt to factor in notional dealing costs to performance figures.
The year that was 2020 (ordered by best to worse one-year total return)
TOTAL RETURN VS INDEX (to 4 Dec 2020) | ||||||||
Screen | Index | Years run | Since inception | 10yr | 5yr | 3yr | 1yr | CAGR |
Piotroski | FTSE 350/All Small/AIM | 8.9 | 229% vs 109% | - | 100% vs 46% | 62% vs 9% | 54% vs 8% | 14% vs 9% |
Monsters of Momentum | FTSE All Share | 10.1 | 314% vs 76% | 292% vs 78% | 57% vs 30% | 41% vs 2% | 30% vs -4% | 15% vs 6% |
Great Expectations | FTSE 350 | 9.0 | 464% vs 84% | - | 97% vs 29% | 46% vs 2% | 24% vs -5% | 21% vs 7% |
Have-It-All | FTSE All Share | 9.0 | 190% vs 82% | - | 23% vs 30% | 5% vs 2% | 23% vs 4% | 13% vs 7% |
Genuine Growth | FTSE All Share/Aim 100 | 8.1 | 222% vs 80% | - | 70% vs 47% | 45% vs 5% | 22% vs 7% | 16% vs 8% |
Strategy Screen | FTSE All Share | 7.8 | 169% vs 49% | - | 64% vs 30% | 27% vs 2% | 16% vs -4% | 14% vs 5% |
Contrarian Value Top 5 | FTSE All Share | 9.4 | 285% vs 71% | - | 35% vs 30% | 27% vs 2% | 16% vs -4% | 15% vs 6% |
Peter Lynch Stalwarts | FTSE All Share | 8.6 | 132% vs 72% | - | 33% vs 30% | 7% vs 2% | 15% vs -4% | 10% vs 6% |
Slater PEG | FTSE Small Cap/Aim | 7.5 | 235% vs 81% | - | 180% vs 55% | 36% vs 12% | 11% vs 15% | 18% vs 8% |
High-Quality Large Caps | FTSE All Share | 9.3 | 401% vs 93% | - | 83% vs 30% | 46% vs 2% | 10% vs -4% | 19% vs 7% |
Screen for all Seasons | FTSE All Share/Aim | 3.6 | 18% vs 9% | - | - | 17% vs 5% | 10% vs 6% | 5% vs 2% |
High-Quality Small Caps | FTSE Small Cap/Aim | 8.3 | 167% vs 113% | - | 39% vs 55% | 1% vs 13% | 8% vs 15% | 12% vs 10% |
Cheap Small Caps | FTSE Small Cap/Aim All Share blend | 7.7 | 103% vs 79% | - | 55% vs 54% | 15% vs 13% | 7% vs 15% | 10% vs 8% |
High Yield Small Caps | FTSE Small Cap/Aim All Share | 8.0 | 220% vs 105% | - | 62% vs 55% | 5% vs 13% | 5% vs 15% | 16% vs 9% |
Genuine Value Small Caps | FTSE Small/Aim | 7.5 | 115% vs 76% | - | 54% vs 55% | 11% vs 12% | 4% vs 15% | 11% vs 8% |
FCF Kings | FTSE All Share | 7.2 | 65% vs 36% | - | 14% vs 30% | 11% vs 2% | 4% vs -4% | 7% vs 4% |
Cash Magic | FTSE All Share | 7.6 | 144% vs 41% | - | 52% vs 30% | 0% vs 2% | 2% vs -4% | 12% vs 5% |
Best of Brit Top 5 | FTSE 350 | 9.2 | 302% vs 82% | - | 45% vs 29% | 37% vs 2% | 0% vs -5% | 16% vs 7% |
Greenblatt | FTSE All Share | 9.9 | 123% vs 73% | - | 41% vs 30% | -9% vs 2% | 0% vs -4% | 8% vs 6% |
Late Bloomers | FTSE All Share | 6.6 | 34% vs 29% | - | 11% vs 30% | 8% vs 2% | 0% vs -4% | 5% vs 4% |
Safe yield | FTSE All Share | 9.4 | 172% vs 70% | - | 29% vs 30% | 7% vs 2% | -1% vs -4% | 11% vs 6% |
O'Shaughnessy Growth | FTSE All Share | 8.8 | 181% vs 68% | - | 16% vs 30% | 5% vs 2% | -1% vs -4% | 12% vs 6% |
Big Reliable | FTSE 350 | 9.6 | 138% vs 68% | - | 35% vs 29% | 32% vs 2% | -2% vs -4% | 9% vs 6% |
O'Shaughnessy Value | FTSE350 | 9.8 | 97% vs 66% | - | 28% vs 29% | -2% vs 2% | -2% vs -5% | 7% vs 5% |
John Neff | FTSE All Share | 8.9 | 190% vs 75% | - | 8% vs 30% | -7% vs 2% | -3% vs -4% | 13% vs 7% |
Inflation Busters | FTSE 350 | 8.9 | 113% vs 69% | - | 25% vs 29% | 9% vs 2% | -3% vs -5% | 9% vs 6% |
Dreman | FTSE All Share | 7.6 | 52% vs 43% | - | -12% vs 30% | -8% vs 2% | -10% vs -4% | 6% vs 5% |
Genuine Value | FTSE All Share | 7.8 | 44% vs 45% | - | -8% vs 30% | -19% vs 2% | -11% vs -4% | 5% vs 5% |
Small Caps on Steroids | FTSE Small/Aim | 2.2 | 16% vs 7% | - | - | - | -13% vs 16% | 7% vs 3% |
Source: Thomson Datastream
Value wins… yes, really
In a year when many have pronounced value investing dead and buried, it feels a bit odd to be highlighting the top screen over the past 12 months as one that takes a classic value approach. The screen in question is the Piotroski screen. It is based on an academic paper published in 2000 by eponymous accounting professor Joseph Piotroski. He identified nine tests that combine to highlight promising value plays. Of particular note given the criticisms levelled at value investing over recent years, the screen uses a traditional and much discredited measure of value, the price to book ratio (P/BV).
Personally, I think there are good grounds to be sceptical about P/BV. Chiefly, it fails to capture the full potential of companies that rely on intangibles such as “brand” and “intellectual property”. However, the ratio can still be a useful tool in the right circumstances.
No matter what the zeitgeist, it is rarely wise to rush to write off common-sense investment approaches that are down on their luck. The chances are that what worked once will work again at some point and under the right circumstances. To that end, the stock screen column remains avowedly style-agnostic.
Many of the screens I follow will soon clock up 10 years of performance data; one already has. I think this is long enough to have a stab at assessing the wisdom of being style-agnostic. Judging from the top three performing screens since inception (measured by cumulative outperformance of their indices) there may not have been any one-true style path over the last decade. That’s in contrast to the consensus view of: growth and quality good, value bad.
Of the top three screens, the one out in front does seem very much flavour of the day – my Great Expectations screen. This combines strong broker forecast upgrades with run-away share price momentum. A key focus of this screen’s stock picks tends to be growth stocks, but it also often does well by highlighting recovery plays just as they start to attract investors’ attention. It’s also the first screen I am due to run in 2021.
The second best performing screen, High-Quality Large Caps, hunts out quality stocks; as the name suggests. This is a tactic employed by many of the top fund managers in the UK today, such as Terry Smith and Nick Train.
However, the third best performing screen since inception sits at odds with consensus. It is a grubby old value screen. The Contrarian Value screen seeks shares with low enterprise values compared with their sales. It also looks for historic levels of profitability that suggest shares have re-rating potential should trading improve.
Arguably, the strong performance of this screen advertises that 'value' still has a place in investing despite all the bad publicity it has received. Indeed, the Contrarian Value screen, while very much adopting a value approach, is different to the plain vanilla, buy-the-cheapest-stocks value approach, which is often cited when chronicling the underperformance of value investing over the last decade.
Size matters
As far as the past 12 months go, it is screens that broadly fit in the category of 'growth' that have performed most strongly (see chart). Even with the truly exceptional 12 month total return from the Piotroski screen of 54 per cent, the value screens lag behind. Somewhat surprisingly, bringing up the rear are the quality screens I monitor.
Another noteworthy feature of the screens is that despite the very strong performance of small-cap indices, my small-cap ones, have all underperformed. Large-cap screens, of which I monitor more than three times as many as small-caps, have produced strong outperformance, though. Mixed cap screen, of which there are only three, have done best.
Much of the reason for the small-cap screen underperformance and large-cap outperformance may come down to the fact that indices have been sending somewhat misleading messages to investors that take a truly active approach. Stock market indices are weighted. This means they put more significance on the share price performance of companies with the biggest market caps. Many of the UK’s biggest companies have done extremely badly in share price terms over the year, pulling down overall index performance. The reverse is true with smaller companies' indices with a number of bigger small caps doing very well.
The chart below compares the index performance over the 12 months with that of the mid-performing share in the index. For any investor that has not been index hugging, returns may well be significantly different.
It should be noted that the constituent lists used to find median (mid-ranking) performance values in the table are the current lists. This means the data suffers from what is termed 'survivorship bias'. This is a jargony way of saying: shares that have vanished the indices over the past 12 months are ignored while those joining the indices are included. While not perfect, the data still serves to illustrate the key issue.
Given the screens are monitored on an unweighted basis it would be nice to monitor them against unweighted versions of the indices but unfortunately we don’t have a source of total return data.
Turning 10
Viewed in one-year performance terms 2020 has been a decent year for the screens. The front-seat view through the year has, however, been terrifying but also exhilarating at times. 2021 marks an exciting year for the column as more screens turn ten. It is somewhat arbitrary to put added significance on performance data just because it spans a decade, nevertheless, I’m particularly intrigued to tot up how the 10 years have panned out as well as to see what stock ideas the screens will be throwing out as the new year rolls by.