We have said this for a while (2018, 2019), but it is true. If you look at 2020 returns of the 19 investment strategies we track, you can only come to one conclusion - the markets are messed up!
With messed up I mean if you look at the performance of nearly all strategies world-wide you will see what has worked in the past (over decades in up and down markets) just did not work in 2020.
And I am not just talking about value investing not working, quality and momentum also did not work.
What REALLY worked great is if you invested in overvalued bad quality companies!
What investment strategies worked in 2020?
So, what worked best world-wide in 2020?
Here is a short summary:
- Buying companies with the highest Value Composite Two value (overvalued companies) would have given you the best return of +49.9%
- Bad Value Composite One companies (with the worst – most overvalued Value Composite One ranking) also performed well up +49.2%
- Low Earnings Yield (EBIT/EV) companies (expensive companies) also performed well and was up +41.9%
- High Dividend Yield was a bad strategy all over the world. Most likely because dividends were cut everywhere to preserve cash. Just think of the major oil companies cutting their already high dividends shortly after oil prices collapsed.
Results were ALL over the place
If you look at the All-Developed Markets table below you will see that how the rest of the strategies performed.
Performance was all over the place – meaning it was impossible to say what strategy would have done well based on long-term back tested returns of strategies that work.
Before I show you the exact strategies and their returns first some information on what and how we calculated the returns.
What strategies we tested – on 9,600 companies worldwide
We looked at the performance of the following 19 investment strategies from 1 January 2020 to 31 December 2020:
- Large vs small companies (Quintile 1 = Biggest companies)
- Book to Market value (inverse of price to book)
- Earnings yield (EBIT/EV)
- Qi Value – the strategy I use in my own portfolio
- Price Index 6m (Current price / Price 6 months ago) also known as 6 months Momentum
- Price Index 12m (Current price / Price 12 months ago) also known as 12 months momentum
- VC One also known as Value Composite One rank
- VC Two known as Value Composite Two rank (Value Composite One with an additional ratio: Shareholder Yield)
- ERP5 ranking (Ranking based on Price to Book, Earnings Yield, Return on invested capital (ROIC), 5-year average ROIC)
- Shareholders Yield (Dividend yield + Percentage of Shares Repurchased)
- Dividend Yield
- Dividend growth 5 years (The geometric average dividend per share growth rate over the past 5 years)
- MF Rank (Magic Formula Ranking developed by Joel Greenblatt)
- Piotroski F-Score
- Qi Liquidity ranking (Adjusted Profits / Yearly trading value)
- Gross Margin Novy-Marx (gross profits / total assets) – the best quality ratio we have tested
- Free Cash Flow (FCF) Score (Calculated by combining Free cash flow growth with free cash flow stability)
- Adjusted slope average (125-day, 250 day) – momentum
- Adjusted slope (90 days) – momentum
Only companies worth more than €50 million trading more than €25,000 per day
We excluded companies with a market value less than €50 million and a median 30-day trading value less than €25,000.
This left a universe of around 9,600 companies which means each quintile of the All Developed Markets back test consisted of about 1,920 companies.
This large number of companies is good because it makes it unlikely that any one company impact the return of any quintile.
Markets worldwide then regions
The following stock markets (and regions) were included:
North American Markets
- USA
- Canada
European Markets
- All the Eurozone countries
- United Kingdom
- Switzerland
- Norway
- Denmark
- Sweden
Japanese Market
- Only Japan
Other Asian and Oceanic Markets
- Australia
- New Zealand
- Hong Kong
- Singapore
All companies in five groups – Quintile 1 the best
To test each of the strategies, using point in time data (so no look ahead bias), on 1 January 2020 we divided all the companies in the universe into five 20% groups or quintiles.
Quintile 1 shows the companies that scored best in for all the strategies we tested - Quintile 5 the worst.
For example, Quintile 1 shows the return of the 20% of companies with the highest book to market ratio (lowest price to book – cheap companies) at the start of the year.
And Quintile 5 shows the return of companies with the lowest book to market ratio (highest price to book ratio – expensive companies).
For Price Index 6m quintile 1 show companies with the best momentum (biggest share price increase over 6 months) and quintile 5 companies with the biggest price fall in the previous 6 months.
For the Piotroski F Score quintile 1 shows the return of companies with the best Piotroski F-Score (9 or 8) and quintile 5 those with the worse F-Score.
For the Size strategy quintile 1 shows the return of the 20% of companies with the biggest market value and quintile 5 the 20% smallest companies.
The best investment strategy world-wide in 2020
The following table summarises how all 19 investment strategies performed world-wide:
For reference the MSCI World Index lost +5.0% in Euro
Click image to enlarge
Best performing strategies worldwide
Source: www.quant-investing.com
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: +10.6%
- Maximum return of Quintile 1 strategies: 32.9%
- Minimum return of Quintile 1 strategies: -5.4%
What worked?
Here are the two best performing Quintile 1 strategies:
- Investing in companies with the biggest one-year price increase (Price Index 12m) was the best strategy returning +32.9%
- Investing in companies with the biggest 6-month price increase (Price Index 6m) was the second-best strategy returning +25.6%
What did not work?
These were the worse Quintile 1 strategies:
- Companies with the highest dividend yield was the worst performing strategy and would have lost you -5.4%
- The second worse strategy was investing in companies with the best Value Composite One ranking. If you used that strategy you would have lost -1.5% of your portfolio.
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The best investment strategy in Europe in 2020
Below is the performance of all 19 strategies in Europe:
For reference the European STOXX 600 Index lost -4.0%
Click image to enlarge
Best performing strategies in Europe
Source: www.quant-investing.com
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: +9.3%
- Maximum return of Quintile 1 strategies: 35.4%
- Minimum return of Quintile 1 strategies: -7.8%
What worked?
These were the best two Quintile 1 strategies:
- Buying the 20% of companies with the biggest 12-month price increase (Price Index 12m) was the best investment strategy in Europe, it gained +35.4%
- Using the Adjusted Slope 125 day / 250-day momentum indicator you would have earned the second highest return in Europe of +28.3%
What did not work
The two worse performing Quintile 1 strategies were:
- If you invested in high dividend yield it would have been the worst strategy you could use as you would have lost -7.8%
- The second worse strategy was investing in companies with the best Value Composite One ranking or low price to book companies. If you used both strategies, you would have lost -3.5% of your portfolio.
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The best investment strategy in North America in 2020
Below is the performance of all 19 strategies in North America:
For reference the S&P 500 Index gained +16.3%
Click image to enlarge
Best performing strategies in North America
Source: www.quant-investing.com
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: +20.8%
- Maximum return of Quintile 1 strategies: +47.5%
- Minimum return of Quintile 1 strategies: -4.1%
What worked?
The two best performing Quintile 1 strategies were:
- Investing in companies with the biggest one-year price increase (Price Index 12m) was the best strategy returning +47.5%
- Using the Adjusted Slope 125 day / 250-day momentum indicator you would have earned the second highest return of +39.6%
What did not work?
The two worse performing Quintile 1 strategies were:
- Investing in high dividend yield companies did not do well and would have lost you -4.1%
- The next worse strategy was buying low liquidity companies based on Qi Liquidity. It would have returned only 3.2%
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This was your best investment strategy in Japan in 2020
Below is the performance of all 19 strategies in Japan.
For reference the Japanese Nikkei 225 Index gained +16.0%
Click image to enlarge
Best performing strategies in Japan
Source: www.quant-investing.com
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: +1.2%
- Maximum return of Quintile 1 strategies: +10.2%
- Minimum return of Quintile 1 strategies: -6.1%
What worked?
The two best performing Quintile 1 strategies in Japan were:
- Investing in companies with the biggest one-year price increase (Price Index 12m) was the best strategy returning +10.2%
- The second-best strategy was buying companies with the largest Gross Margin (Novy-Marx) which returned +9.4%
What did not work?
The two worse performing Quintile 1 strategies were:
- Companies with the highest dividend yield was the worst performing strategy and would have lost you -6.1%
- If you invested in high book to market (low price to book) companies, you would have had the second largest loss of –6.1%
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The best investment strategy in Asia and Oceania Markets in 2020
(Australia, New Zealand, Hong Kong, and Singapore companies are included in this analysis)
Click image to enlarge
Best performing strategies in Asia and Oceania
Source: www.quant-investing.com
How all the best rated companies (Quintile 1) perform?
- Average return Quintile 1 of all strategies: +9.5%
- Maximum return of Quintile 1 strategies: +23.7%
- Minimum return of Quintile 1 strategies: -2.8%
What worked?
The two best performing Quintile 1 strategies were:
- Investing in companies with the biggest six-month price increase (Price Index 6m) was the best strategy returning +23.7%
- Investing in companies with the best Adjusted Slope 125 day / 250-day momentum was the second-best strategy returning +23.2%
What did not work?
The two worse performing Quintile 1 strategies were:
- If you invested in high book to market (low price to book) companies, you would have had the biggest loss of -2.8%
- The next worse strategy was buying high Dividend Yield companies. It would have lost gained only 0.5%
Returns all over the place – This is normal
As you can see no one strategy worked everywhere – sometimes exactly the opposite worked – this just proves that over the short-term anything is possible.
A warning – investment strategy may stop working
Remember just because a strategy did well in 2020 does not mean it will continue to do so. As you can see the same strategy performed well in one region and terribly in another.
Jumping on the best performing strategy is most likely a bad idea - possibly a very bad idea.
In fact, your best strategy may be the worst performing strategy as it may turn around. Just like you I have no clue as to what strategy will work in the future and if someone says he does, he is lying.
If you want to read about the best strategies we have tested click here: Best investment strategies Quant Investing
Wishing you profitable investing for 2021
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PPS It is so easy to put things off, why not sign up right now?
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