![]() ![]() But if you used the best performing strategy, your return would have been 11.57 times your initial capital compared with only 7.13 times if you used the 11th best strategy! For example, the 11th best performing two-factor strategy, 12 month free cash flow yield combined with price-to-book ratio, led to a total return of 713.7%. This strategy will give you market beating results, but not nearly as good as buying companies where the share prices are already increasing. And the cheaper the company gets, the higher your returns would be. We always thought buying a cheap, good company would give you market beating results. This was hard for us to fully grasp as classical value investors. Very interesting was that the 10 best performing two-factor strategies all had one momentum factor as one of the factors. Two factor results What if we told you we found a simple two factor method you can use to select investments that led to a 23.5% per year compound return (market was 2.25%) over the 12 years we tested? That is a total return of 1157.5% compared with the 30.54% the market returned! That is what a combination of the 6-month price index with the lowest price-to-book value companies returned. Of the two investment strategies we tested, the ERP5 strategy beat the MF for small (compound 12.95%Ĭompared with 7.33%), medium (compound 11.76% compared with 9.05%) and large companies (compound Interesting to note is that with small companies, unlike with medium and large companies, valuation factors did not lead to the best returns. For large companies the best factor was free cash flow yield, leading to compound growth of 10.81%, with earnings yield a close second with a compound return of 10.64%. Second was the five year average free cash flow, generating a compound 12,83%. For medium sized companies the best factor was price-to-book value, which generated an astounding compound return of 14.36% over the period. The second best factor was the 12-month price index, generating a return of 10.32%. The second best average factor was the 12 month free cash flow yield that generated a compound annual return of 10,87%.įor small companies the best single factor was the 6-month price index which generated a compound annual return of 11.91%. Single factor results If we averaged the return over large, medium and small companies, the best factor was the price-to-book ratio, generating an average compound annual return of 10.92% compared with 2.25% for the market over the period. What we found mostly confirmed what other research studies found, but a few results were really astounding. In addition, we also tested two investment strategies, the MF and the ERP5 strategy, for their ability to outperform the market. ![]() When we found a factor that showed strong out-performance we tested it together with other factors to see if two factors generate even more market outperformance. We not only tested the historical value of the factors, but where it made sense, we also tested the 5-year average to see if it is a better indicator to use to generate market outperformance. With this paper we would like to make a contribution and examine what factors led to excess returns in the European markets over the 12-year period from 13 June 1999 to 13 June 2011. In comparison with the USA there have been relatively few studies conducted on what works in investing in the European stock markets. Value, momentum and changes in fundamentalsp36Īppendix 1: Piotroski F-Score Calculationp39Īppendix 2: Single factor test results.p40Īppendix 3: tow factor test results.p48 Results single factor analysis hybrid factorsp21Ĭombinations with earnings yield as primary factor.p26Ĭombinations with price-to-book as primary factor.p27Ĭombinations with 12-month free cash flow as primary factor.p28Ĭombinations with price-to-sales ratio as primary factor.p29Ĭombinations with the Piotroski F-score ratio as primary factor.p30Ĭombinations with the 12-month price index as primary factor.p31Ĭombinations with the 6-month price index as primary factor.p32Ĭombinations with the MF Rank as primary factor.p33Ĭombinations with the ERP5 Rank as primary factorp34 Results single factor analysis momentum factorsp19 Results single factor analysis fundamental factorsp15 Results single factor analysis valuation factorsp11 The problem of our emotions and the influence on our investments returnsp5Ĭombining the strategies multiple factors.p10 By Phillip Vanstraceele & Tim Du Toit - March 2012 ![]()
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