Want to manage multiple styles?

Styles go in and out of favour, so it's better to have more than one - here's how to build your own value and growth portfolio

Ruth Saldanha 24 May, 2019 | 2:00PM
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Emily Halverson-Duncan: It's not uncommon for equity investors to categorize themselves based on their preferred investment style, for example, a value investor or an income investor. While the practice has its benefits, there's also the option to manage multiple investment styles rather than just one. Doing so will offer the advantage of having a better diversified portfolio that maybe better able to weather adverse markets as each individual style goes in and out of favor.

Today, my strategy is built using two different investment styles, value and growth. The value sleeve will represent 50% of the strategy and then the growth sleeve will represent the other 50%. So, let's take a look at how they are constructed.

First off, starting with the growth. We are only looking at – one thing to know is, we are only looking at stocks in the CPMS 250. So, what that is, it's the top 250 stocks based on market float. So, we're really looking at a larger cap universe and trying to screen out those less liquid small-cap names.

First off, we are going to rank those 250 stocks based on their latest reported return on equity, so a higher value is preferred; 5-year annualized cash flow growth; and 5-year annualized sales growth. And then, from a screening perspective, we are going to look at a return on equity that's at least 5%; a positive cash flow growth and a positive quarterly earnings momentum are few of the factors we'll use to screen. And then, on the sell side, for this growth component, we're going to sell if the quarterly earnings momentum drops below 6% or if a company misses their earnings by 6% or more.

So, that's the one half of the model. The second half is your value component. So, for the value component, again, we're using that CPMS 250 as the universe, so more large-cap names. And first off, we're going to rank the stocks based on a number of factors, some of which include price to trailing earnings, so you want a lower value for stocks to be more undervalued; price to training cash flow; and price to forward earnings. So, again, those are three different value metrics we're using. We want them to be lower for the stocks that we would consider buying. Then we are going to screen out stocks that have a positive three-month earnings per share estimate revision. So, that means that across the three-month time span the earnings are getting revised upward and we want a minimum trading volume just to remove any sort of low liquidity names.

On the sell side, we are going to sell stocks if that three-month earnings per share estimate revision falls below 10%, negative 10%.

So, now that we've constructed our sleeves, we can go and back test it and see how the model did. So, here, we are going to be back testing our model with 10 stocks in each sleeve. The timeframe will be December 1985 to end of April of this year. So, let's go ahead and give it a run.

Okay. So, the combined strategy results are 13.9% annualized and again, that's a combination of half the value model with 10 stocks and half the growth model with another 10 stocks. The turnover was 79%. So, turnover looks at how often you are going to be trading stocks out of a model. So, if we're looking at just 10 stocks, that means you're probably going to be trading roughly eight of them in a year.

A couple of other metrics I like to look at. This chart here, the green and blue chart, tells you how the model did in both up and down markets relative to the benchmark. So, we can see in up markets it outperformed 58% of the times and down markets it actually outperformed 77% of the time. So, if you are looking at preserving capital and having good downside protection, that's actually a pretty strong indicator. So, overall, we can see the combination of both value and growth, two pretty different styles has produced some pretty attractive returns and pretty low risk.

For Morningstar, I'm Emily Halverson-Duncan.

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About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.


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