2014 Guru Strategy Review: Income And Growth Strategies Lead In Challenging Year

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Includes: ABDNF, ASOMY, BTDPY, MNQQY, PSMMY, QUPPF, TFSTF, UUGRY
by: Stockopedia

Our 2013 review of the 60 GuruModel investing strategies tracked by Stockopedia picked up on some incredibly strong performances. Strategies that focus on small and mid-cap companies soared as investors swept into riskier parts of the market. It was perhaps a tall order to expect that confidence to stay intact. After all, many stocks on stretched valuations were under pressure to hit earnings expectations. With many of them missing those targets, earnings season turned into a bloodbath for some and 2014 proved to be much more challenging for the gurus.

The long-only GuruModels span a range of investment disciplines -- from deep value small-cap bargains to high yield blue-chip income. That means benchmarking them against a single index isn't always that useful. Likewise, the demanding criteria of these screens means that some of them don't always offer up adequate numbers of realistically investable stocks.

Index/Strategy Composite 1 Year Performance
FTSE 100 -2.7%
FTSE 250 0.9%
FTSE All Share -2.1%
FTSE SmallCap XIT -4.8%
AIM All Share -17.4%
AIM 100 -20.7%
Top 10% StockRank stocks
(> £10m Mkt Cap)
1.2%
Guru Strategy Composite -2.65%
Income Composite 1.0%
Growth Composite -0.8%
Value Composite -1.9%
Momentum Composite -3.2%
Quality Composite -3.9%
Bargain Composite -9.8%

Caveats aside, the overall GuruModel Composite just beat the FTSE 100 by 0.05% and the FTSE All Share by 0.55%. But it did better against small cap indices which may be more appropriate -- beating the FTSE SmallCap by 2.15% and the AIM 100 by over 18%. The notable poor performance of the AIM 100 last year, down 20.7%, was exacerbated by a handful of single stock wipeouts. Tumbling prices at previously high flying shares like Asos (OTCPK:ASOMY), Quindell (QUPPD) and Monitise (OTC:MNQQY) all dragged on the performance.

Individually, all the strategy composites except the Bargain Composite remain ahead of the FTSE 100 over the past two years. During that time, the best overall performance has come from the Momentum strategies, which have produced a 41% return.

Which investing strategies worked in 2014?

Overall, it was the Dividend strategies that managed a whisker of outperformance this year -- as we wrote about in detail here. Growth strategies also held up well, with our interpretation of US investor William O'Neill's CAN-SLIM strategy topping the list with a 9.9% return. Among the highlights during the year, the strategy made significant gains on stocks like Sprue Aegis, Plus 500 and Solid State.

Our modelling of the Robbie Burns' Naked Trader approach netted a 7.0% gain, helped by positions during the year in Trifast (OTC:TFSTF), Kentz (which was taken over) and, latterly, Mountview Estates. That was followed by the academic-inspired Growth at a Reasonable Price (GARP) model, which finished the year up 5.4%.

Among the Quality screens, it was the Cash Accruals strategy that edged the best performance with a return of 7.3%. This is a strategy based on evidence that companies with small or negative accruals tend to outperform. It's an approach that managed to ride substantial price gains on stocks like Barratt Developments (OTC:BTDPY) and United Utilities (OTCPK:UUGRY).

At the other end of the performance range, it was a dire year for the Peter Lynch growth screen whose strict criteria make this a highly concentrated screen with an average of 4.5 stocks held With a 23.5% fall, the risks of concentration are all too clear. We repeatedly preach the benefits of broad diversification in portfolios, and it's no surprise that more diversified strategies have crushed many concentrated strategies this year.

It was also a poor year for the Joel Greenblatt Magic Formula strategy, which underperformed by 13.9%, although it remains up by 7.6% over the past two years. Greenblatt originally warned that the Magic Formula could underperform over prolonged periods -- and that's certainly what we saw in 2014. There are though a growing number of voices who query the efficacy of Greenblatt's perhaps overly simple model.

Value strategies under pressure

After a strong performance in 2013, one of the biggest challenges facing Value investing strategies in 2014 was the dearth of opportunities. Leading the list at the end of the year was the extremely demanding John Neff Value screen, which returned 8.8%. Neff's strategy looks for good companies with moderate growth and high dividends while out of favor. During the year it saw useful gains on stocks like Fairpoint, Travis Perkins and Pace. Elsewhere, that return was matched by another contrarian value strategy, the David Dreman Low Price to Cashflow screen. It was helped by positions during the year in Persimmon (OTCPK:PSMMY), Aberdeen Asset Management (OTC:ABDNF) and Plus 500.

The best performing Momentum strategy this year was the Richard Driehaus screen, which looks for both price and earnings momentum in stocks. It returned 12.1% through the year and picked some strong performers early on, including Solid State, Chesnara and Staffline. It was a similar story with the James O'Shaughnessy Tiny Titans momentum screen, which notched up a 7.1% return. This small-cap focused value and momentum approach picked up some major gainers like Character, Servoca and Victoria.

What to expect in 2015?

After the glorious gains of 2013, investors faced much more challenging conditions in 2014. Weaker sentiment in small-caps in particular caused havoc for many of the GuruModels tracked by Stockopedia. It ended up being the Dividend strategies, which gravitate to larger, better quality and higher yielding stocks, that performed the strongest. In good times, these income strategies could be seen as a little boring for investors searching for blistering capital growth. But in 2014 they proved to be one of the few sources of outperformance. The best performing GuruModels this year tended to be some of the most demanding quality, value and momentum approaches. There is little to suggest that a marriage of those disciplines won't continue to find the best performing shares in the market in 2015.

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