Investors needed to be doing something special to outperform the FTSE 100 during the first three months of 2013, rising as it did by 8.7pc. While there was little concrete evidence that the global economy is fully on the mend, equities became an increasingly attractive option against cash and bonds – and it was a strategy that paid off handsomely.
Indeed, the mini bull run that got underway six weeks before the close of last year continued largely unabated – driving up the index to 6504 points in mid-March before a modest retreat. Heading into the second quarter, creeping concerns, particularly on the subject of commodity prices have introduced some more serious looking wobbles to the FTSE. That uncertainty chimes with the views of some analysts who think that "Sell in May" (or earlier) would be a judicious move this year.
For those investors prepared to take a "quant" approach to the market, ditching the froth and frenzy that comes with rising markets in favour of systematic strategies, worked well - albeit not as well as in some previous quarters, presumably reflecting the way a rising market tide indiscriminately lifts all boats. Most of the screening strategies modeled at Stockopedia did beat the market, with 56pc of the GuruModel investment portfolios (long and short) outperforming the FTSE 100. Taking into account the murky world of fund fees, which can take a sizeable percentage bite out of returns, then the vast majority of these models from the masters of finance would likely have trounced net managed fund returns.
Overall, 30 of the long only strategies produced increases ranging from 8.9pc to 20.0pc. Over 12 months, the Stockopedia Composite Index of these models has produced a return of 16.2pc versus 9.43pc for the index of leading shares.
Quality rules but bargains still on offer
Among the top performing guru portfolios there was a definite trend towards "quality" stocks with a growth flavour. However, the very best performance was reserved for the volatile Ben Graham-inspired "Net Nets" bargain stock screen, which just edged a 20pc return. Graham’s ultra conservative valuation model, which digs out stocks trading at less than liquidation value by a sizeable margin, has continued to turn up valuation turnarounds. That performance has sustained its position at the top of the bargain screen list into the second quarter.
Meanwhile, the F-Score checklist for financial strength – as developed by Joseph Piotroski (one Stockopedia’s favourite finance professors!) – continued to prove its mettle. Piotroski’s price-to-book value screen delivered an 18.8pc return while a quality approach of simply tracking stocks with high F-Scores would have produced a handy 11.5pc performance. Evidence then, if any were needed, that a checklist for finding shares with improving financial discipline delivers results.
Elsewhere among the "quality" screens, the Warren Buffett inspired Buffettology-esque Sustainable Growth (+17.0pc) and Historical Growth (+15.0pc) both featured in the top ten performers. Likewise, the SocGen-esque Quality Income strategy, which searches out high F-Score dividend payers, excelled with a 16.1pc return (before dividends).
Unsurprisingly given the market’s strength, momentum strategies were also in contention with Earnings Upgrades (+19.97pc) and Value Momentum (17.19pc) both inside the top ten. Bill O’Neill’s CAN-SLIM (+15.4) strategy took the top spot among the growth strategies, followed by Robbie Burns’ Naked Trader-inspired screen, which produced a 12.3pc return. Interestingly, over 12 months, our take on the Naked Trader screen actually edges O’Neill on performance (22.66pc versus 19.59pc). But even more astonishing is the remarkably smooth trajectory that the Robbie Burns inspired portfolio has produced – take a look at this!
Mixed news on dividends
While a couple of the income strategies jockeyed for position towards the top of the performance league (including Quality Income and Winning Growth & Income (16.85pc), a handful of dividend screens actually underperformed in the first quarter. Dividend Dogs of the FTSE 100 (+5.41pc), Forecast Dogs of the FTSE 100 (+6.37pc) and Dividend Achievers (+6.46pc) were all underwhelming. Part of the reason seems to be that a small but significant number of dividend "regulars" – including the likes of RSA Insurance (OTC:RSAIF), Aviva (AV) and Shell (RDS.A) (RDS.B) – saw their share prices fall in the first quarter and that affected the figures.
While our performance measures don’t yet include dividend income, recent analysis by Capita Registrars has pointed to some interesting changes in dividends over the past three months. In particular, rising share prices and slowing dividend growth put the brakes on 12-month prospective yields during the first quarter – down to 4.0pc from 4.5pc. So it will be interesting to see how those dividend strategies play out this year.
What to watch in the second quarter
It remains to be seen whether signs that investors are turning away from yield in favour of quality and growth will continue. With many market watchers predicting some sort of correction in equity prices in the near future it might be too early to say that dividend stocks are completely out of favour. In fact, even on a prospective yield of 4.0pc, it would be difficult to say that dividends have lost their sparkle.
What is perhaps more clear is that value plays are becoming harder to come by. With rising share prices, the basket of potentially undervalued stocks that were on offer just three months ago has shrunk dramatically. So for the time being, as Mark Slater pointed out at the U.K. Investor Show, the focus has switched to quality and those stocks that continue to offer investors the expectation of continued earnings growth.