This post will be an English summary of my two recent posts (in Swedish) about my Consumer Staples portfolio, which you will find here and here. While I normally write all my posts in Swedish, I will be providing English summaries for this specific strategy, since I will only trade with U.S. stocks. By using the original names for the strategies (as opposed to Swedish ones) I have noticed that my blog attracts readers from outside of Sweden. So the plan is that whenever I do my yearly rebalance of this portfolio, I will also provide the information in English so that any non-Swedish readers can follow my progress (and perhaps be inspired to try the strategy out for themselves).
This blog is mainly about my tracking of four quantitative strategies which I plan to be invested in for many years to come. The first two are a Trending Value-portfolio and a Magic Formula-portfolio. This December I will start the fourth portfolio. Which strategy it will be based on is yet to be determined. I do put out monthly written reports where I discuss how they perform, but they will always be in Swedish. Numbers however are quite universal, and can be viewed here, where they are also updated monthly. Keep in mind that I will not present any results for this strategy until the beginning of October.
The Whys and Hows
I have chosen Consumer Staples since I want one of the strategies to be more defensive than the rest. Non-Cyclical sectors (Consumer Staples, Utilities, Health Care to some extent) tend to do better than the overall stock market (or at least less bad) in times of economic recession.
Source: Novel Investor
The strategy can be found in “What Works On Wall Street” by James O’Shaughnessy, although I will make some exceptions from the guidelines in the book. Each year at the beginning of September, I will sort all stocks in the sector by Shareholder Yield. I will then buy the top 12 companies and hold for a year, after which I will do a new screen and replace the portfolio with the current top-ranked companies.
While this seems like a fairly easy strategy to implement, appearances deceive. Shareholder Yield is a performance indicator rarely found in screeners (although it is often possible to calculate it by adding the inverted 12-month change in outstanding shares to the last reported Dividend Yield). Quite a few screeners out there also use a different industry taxonomy than the one used in the book (GICS). Lastly, no screeners provide this information for free (which can really cripple the prospect for the strategy when the starting capital is low).
That being said, Portfolio123 offers a 15-day trial period during which you have access to most features of their screener. Backtesting is definitely more limited during those 15 days, but this year it managed to meet my needs.
In short, these are the rules for this portfolio:
- The stock is part of the sector “Consumer Staples” (according to GICS)
- Trades on any of the following exchanges: NYSE, NYSE MKT LLC (former AMEX) or NASDAQ
- ADRs (American Depository Receipts) are included, OTC stocks are not
- Minimum market cap at $50 million
- The 12 companies with the highest Shareholder Yield are bought and kept for 12 months
Unlike the book I will not follow the “red flags” O’Shaughnessy dictated for all of his strategies, e.g. buyouts, dividend cuts or stop-losses (p. 56 in WWOWS). I might consider them if a company faces serious allegations regarding something, but that will have to be on a case-by-case basis.
This years’ portfolio:
It turned out to be a real mix of some of the largest ones in the sector, as well as a few quite small ones (PG has a market cap almost 3000 times greater than WILC!). The average P/E is quite high (as with the market in general these days), so it remains to be seen if the first year will be a year of continuing rising stock prices or a struggle to keep the loss at a minimum. Regardless, there is nothing I can do about it until the 1st of September 2018!
Slight variations of the strategy – for long-term evaluation
For every strategy I will also be keeping track of the performance from using slight changes in ratios. For this strategy, apart from ranking the companies using Shareholder Yield, I will also use Dividend Yield and EV/FCF. Those have historically been the top 3 performing ratios in this sector. The results from these “comparison portfolios” will only be based on the closing price the 1st of September together with the Dividend Yield at that time. It is a rough way to compare different ratios, but the idea is to see if I have chosen the “right” ratio to base my strategy on, or if I should modify the strategy in a few years’ time.
I do not want it to come off as if I will be chasing the best performance ratio by constantly adjusting my strategy based on the previous year’s best performing factor. Instead, I plan to evaluate these portfolios after several years have passed. If other factors starts to outperform SY, is that something I believe will reverse in the coming years, or is it due to some fundamental change that cause certain ratios to lose their usefulness?
An example of the latter can be found in a fairly recent paper from O’Shaughnessy Asset Management, discussing the declining usefulness of Price-to-Book.
I will report the performance of these other ratios when I do my yearly rebalance of the strategy (perhaps even at six months’ interval, time will tell).