Strategies Review Q3 2017 - Momentum And Growth Strategies Lead The Way

by: Stockopedia

Momentum, Growth and Quality investing strategies saw the strongest returns in the third quarter of this year - in the UK, across Europe and in the United States. For the 60 Guru-inspired investment strategies tracked by Stockopedia, these are proving to be ideal conditions.

For the first time in over a year in the UK, there were clear winners and losers among the different investment styles. Strategies that chase growth and momentum have outperformed and saw decent profits in Q3. But value and deep value bargain styles have suffered over the summer.

Index / Strategy Composite

Q3 2017 Performance

12 Months' Performance

FTSE 100 (UK)

+0.8 pc

+6.9 pc

FTSE 250 (UK)

+2.8 pc

+11.2 pc

FTSE SmallCAP XIT (UK)

+2.3 pc

+14.0 pc

AIM 100 (UK)

+5.5 pc

+30.1 pc

S&P 500 (US)

+4.0 pc

+16.2 pc

FTSEurofirst 300 (Europe)

+1.8 pc

+12.4 pc

Guru Strategy Composite (UK)

+2.7 pc

+20.5 pc

Momentum Composite

+7.7 pc

+25.7 pc

Quality Composite

+4.3 pc

+17.9 pc

Growth Composite

+3.8 pc

+35.7 pc

Income Composite

-0.9 pc

+14.9 pc

Value Composite

+0.5 pc

+13.1 pc

Bargain Composite

-0.4 pc

+18.7 pc

Market round-up

Before we dive into the latest quarterly performances of the Guru Strategies, it's worth taking a quick look at the context.

UK markets were pretty flat over the summer. The Alternative Investment Market, the smaller company index closely watched by individual investors, continued to set the pace. The AIM 100 (of the largest stocks on the index) has grown at a faster rate than all the other main indices in each of the past four quarters. AIM's growth has slowed from the double-digit rates we were seeing in Q3 and Q4 last year, but the 5.5 percent gain in the past quarter is still eye-catching. But to put that in context, AIM is only just getting back to where it was in 2008, ahead of the financial crisis.

In the United States, there was a hint of a wobble in August for the otherwise relentless S&P 500. But it quickly bounced back and broke the 2,500-point mark the following month. Some have called this "the most hated bull market in history", but so far there's been no let-up in a run that now stretches well beyond eight years.

Elsewhere, the FTSEurofirst 300 hit a soft patch in May that saw the index lose value right through the summer. But there was a pick-up in September that cancelled out that lost ground.

About the Guru Strategies

We're in our sixth year of tracking the Guru Strategies. They've become a useful way of seeing what's working in the market and how different styles react to different conditions. The strategies cover a range of approaches used by some of the world's best-known investors. They're categorised as either Quality, Growth, Value, Bargain, Income or Momentum.

Each strategy has its own set of rules, and we constantly screen the market for companies that meet them. At the end of each quarter, those passing the rules are held in a portfolio for each strategy, which we track. The models aren't always realistically investable, and sometimes there may not be many companies that meet the rules of some of them. In addition, we don't account for the drag of trading costs or the bonus of dividend payments.

Momentum leads the UK market

At 7.7 percent for the quarter and 25.7 percent for the past 12 months, the composite return from the nine Momentum strategies we track puts them in top position. Digging in, the Earnings Surprise screen was the big winner over the three months, with a 14.0 percent gain. That was followed by James O'Shaughnessy Tiny Titans on 13.2 percent and the 52 Week High Momentum screen on 12.5 percent. We've taken a closer look at all three of those strategies in recent weeks - here, here and here.

Quality investing strategies have held their own over the past year, but it would be hard to say they'd sparkled. Arguably, the investment flows that have swept into fast-growing stocks haven't made it as far as companies with the kind of longer-term track records demanded by the Quality strategies. But there were signs of improvement in Q3. The Warren Buffett-Hagstrom strategy, which has a demanding set of rules to pass, had a great result with a 21.3 percent return. There were useful gains in housebuilders like Taylor Wimpey and Redrow. But the really big wins came from rapid recoveries in out-of-favour stocks like Plus500 and Next.

Growth rules in the US

There wasn't much to choose between the performance of the Quality and Growth strategies in the US in Q3, and both of them underperformed the S&P. In fact over 12 months, across all the strategy styles, the only one to beat the index was Growth, with a composite return of 24 percent. Over that period, the Peter Lynch-inspired Growth screen has performed the best, with a massive 70.5 percent return.

As for the past quarter, the strongest overall strategy performance was seen in the R&D Breakthroughs screen with a 30.0 percent return. Among the Growth strategies, the best result was seen in the Charles Kirkpatrick Growth screen, which returned 10.3 percent.

US Top-Performing Styles (Q3)

Q3 2017 Performance

12 Months' Performance

Quality Composite

+0.6 pc

+14.6 pc

Growth Composite

+0.4 pc

+24.0 pc

Momentum dominates in Europe

While momentum strategies have done well in the UK, they've actually done far better across Europe. Over the past year, strategies like Earnings Upgrade Momentum, Tiny Titans, Price Momentum and Josef Lakonishok Momentum have each delivered returns of more than 40 percent across the region.

One interesting feature is that, like in the UK a year ago, value and deep value bargain strategies are right up there in the mix in terms of performance. In fact, all the strategy styles have done well in Europe over the past year, and there isn't a runaway leader. With the exception of Income strategies, they've all seen high 20-plus percentage gains over the past 12 months. Add in dividend returns, and the Income strategies are in contention, too.

Europe Top-Performing Styles (Q3)

Q3 2017 Performance

12 Months' Performance

Momentum Composite

+2.4 pc

+29.5 pc

Bargain Composite

+2.3 pc

+28.7 pc

All eyes on the final quarter

Through the lens of the Guru Strategies, the third quarter was a strong one. In the UK and Europe, on the whole, the majority of styles have been outperforming the main indices. In the States, the Guru-inspired screens are up against the seemingly relentless pace of the S&P, which is making it hard for them.

In common with the US, the strongest returns in the UK have been in Momentum and Growth strategies, with Quality screens making strong gains in recent months. In Europe, it's a more balanced picture - and one that's proving to be the most profitable overall.

Both in the UK and across the pond, there's a lot of talk about how, when and what form a market correction will take. It's impossible to know, but right now upward momentum is prevailing. In these conditions, there are likely to be some sharp collapses in individual stocks that disappoint the market. But in the absence of any major shocks, the general popularity of momentum and growth looks set to continue.

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