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The Screen of Screens – A Robust Methodology

 November 30, 2012 02:12 PM


(By David Brickell) The Screen of Screens identifies stocks that are appearing most frequently across all the other long-only investing screens tracked on Stockopedia – be they value, bargain, growth, quality, income or momentum. This strategy is particularly interesting because the stocks on the list may appeal to a broad range of investors. In many cases, these companies will also likely be meeting a varied list of robust quantitative fundamental and technical criteria. 

Background 

Stockopedia currently tracks 59 long-only stock strategies (excluding the Screen of Screens) developed by some of the most prominent investment professionals, gurus and academics in the world. In the year to date, 49 of those strategies have produced a return of more than 5%, versus a FTSE 100 return of around 4.1% (i.e. 83% of them are beating the market). Of those, 42 screens are producing double-digit returns, with 12 of them up over 25% against the market. The best performer so far this year is the Contrarian Value screen based on the work of US investor Bill Miller, which is up by a staggering 55.4% albeit with a highly concentrated portfolio. 

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As a natural consequence of changing market conditions, different types of strategy tend to flourish at different times. For instance, the mini bear market that took hold during the spring of 2012 did wonders for income screens because the dividend-paying stocks in those portfolios became even more appealing for income hunters. Likewise the rally that occurred during the second half of the year meant that a number of value investing strategies were well rewarded. 

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Beyond those specific patterns, the trends between the performances of particular investing philosophies are much more subtle; the top 25 performing screens include the whole spectrum of investing approaches. In some years, popular and widely followed strategies can turn out to disappoint, which has been the case in 2012 with Kenneth Fisher's Price-to-Sales screen. Meanwhile, others consistently lead the rest of the pack, which has been the case this year with David Dreman's High Dividend screen. With that in mind, it may be better to take an approach to the market that is less weighted towards a specific style, or one that aims to maximise the benefits of all styles at all times. 

How it works 

The Screen of Screens picks the stocks that qualify most often across all of Stockopedia's ‘guru' screens. Companies that make it onto the list must be appearing on at least three other guru strategy screens. Having said that, a company would currently need to be qualifying for at least five before managing to get into the top 75 stocks on this list. The advantage for investors is that qualification is not restricted by market cap or sector or indeed by style, providing a diverse basket of small, mid and large cap stocks. The screen overview provides a snapshot of each company's P/E ratio, yield and Piotroski F-Score, making them easy to rank on value, income and quality measures. 

Does it work? 

In the year to date, the Screen of Screens has produced a return of 21.6% versus 4.1% for the FTSE 100 and is currently beating the FTSE 100 across every timeframe. Among our nine quality screens it currently ranks third in terms of return performance. 

Benefits of the approach 

The legendary critic of efficient markets, Robert Haugen, has illustrated in his work that it can be more profitable to construct a portfolio of stocks that shows all the properties of an ideal stock at the aggregate level rather than in each holding individually. The danger of most sequential screening approaches is that they tend to highlight stocks with a uniform profile, making them extremely susceptible to swings in the market's preference for certain styles at certain times.  The Screen of Screens, by its very nature, tends to hold a more diverse set of stocks and may be more robust to market whims as a result. 

What to watch 

By definition, stocks that display strong fundamentals over the long term are often found in defensive sectors. While these companies don't suffer as much volatility as cyclical sectors in bear markets or during difficult economic periods, they often don't enjoy as much upside in bull markets either. The risk is that the Screen of Screens could at times be a stalwart but unexciting performer. There may also be significant drift in the Screen of Screen's weighting towards different styles as the market as the market moves through bull and bear cycles – a unknown worth monitoring. 

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