Multi-Factor Sector Based Investment Strategy (MFSS)

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Multi-Factor Sector Based Investment Strategy
(MFSS)
STAT 682 Quantitative Financial Analytics
STATISTICS

• Team Ichiban
• Wei Fu, Dingyi Li, Fei Ni, Taliya Perera,
  Benjamin Tang
• 28th November 2011

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STAT 682 Quantitative Financial Analytics
STATISTICS

• Scope
• Fund Investment Strategy
• Dataset Management Process
• Portfolio Selection Mechanism
• Benchmarks Back-testing the Funds Strategy
• Returns and Results
• Conclusion

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STAT 682 Quantitative Financial Analytics
STATISTICS

• Fund Investment Strategy
• The Original OShaugnessey Multi-factor Strategy
• Price-to-Earnings (PE) ratio between 0 and 20,
  then selecting Best One-Year Performers (Top
  50).
• Price-to-Book (PB) ratio less than 1, then
  selecting One-Year Performers (Top 50).
• Price-to-Sales (PSR) ratio less than 1, then
  selecting One-Year Performers (Top 50).

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STAT 682 Quantitative Financial Analytics
STATISTICS

• Fund Investment Strategy
• Multi-Factor Sector Based Strategy
• Why did we add Sector Analysis to
  OShaugnessys method?
• Correlation trades, Proxy trades, Complementary
  growth,
• Difference of inter-sector indicator norms.
• Growth is under-represented in his model
  relative to momentum
• and value.
• How did we add Sector component into the
  strategy?
• The top 50 stocks in each of the multifactor
  model are identified.
• Sector proportion (Ps) of the top 50 stocks are
  compared against the
• (Pu) of the entire universe.

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STAT 682 Quantitative Financial Analytics
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• Fund Investment Strategy
• 3 Different MFSS Approaches
• Top 10 stocks using the original approach, plus
  the top 5 stocks from the highest ranked sector.
  (Total of 15 stocks).
• Top 15 stocks using the original approach, with
  stocks in the highest ranked sectors (if any)
  given double weight.
• Top 3 stocks each from the 5 highest ranked
  sectors.

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STAT 682 Quantitative Financial Analytics
STATISTICS

• Scope
• Fund Investment Strategy
• Dataset Management Process
• Portfolio Selection Mechanism
• Benchmarks Back-testing the Funds Strategy
• Returns and Results
• Conclusion

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STAT 682 Quantitative Financial Analytics
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• Data Management Process
• Wharton Research Data Services (WRDS)
• - Compustat Fundamentals Annual
• - CRSP Monthly Stock File
• Annual Returns of Portfolios
• - Dividends included
• - Adjusted for AJEX (Splits and Such)
• - Accounted for data lags (April 1st
  Rebalancing)
• Other Adjustments/Assumptions
• - March Month-End price close used. (CAPM
  assumption of sorts)
• - Brokerage (1 hit p.a. in 1970s 80s, 450
  p.a. thereafter.)
• - Tax deferred investment account.
• - Delisting and Acquisitions

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STAT 682 Quantitative Financial Analytics
STATISTICS

• Scope
• Fund Investment Strategy
• Dataset Management Process
• Portfolio Selection Mechanism
• Benchmarks Back-testing the Funds Strategy
• Returns and Results
• Conclusion

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STAT 682 Quantitative Financial Analytics
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Portfolio Selection Mechanism General
Procedure - Recreate OShaugnesseys ranking
(by previous returns) for each of the
three segments in his portfolio. - Calculate
the Ps Pu for each of the three segments. -
Apply it to generate the portfolios for the
funds strategy.
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STAT 682 Quantitative Financial Analytics
STATISTICS
Sample Portfolios (1975)
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STAT 682 Quantitative Financial Analytics
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Sample Portfolios (1985)
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STAT 682 Quantitative Financial Analytics
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Sample Portfolios (1995)
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Sample Portfolios (2005)
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Sample Portfolios (2009)
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Sector Weights
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STAT 682 Quantitative Financial Analytics
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• Scope
• Fund Investment Strategy
• Dataset Management Process
• Portfolio Selection Mechanism
• Benchmarks Back-testing the Funds Strategy
• Returns and Results
• Conclusion

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STAT 682 Quantitative Financial Analytics
STATISTICS
Creating Benchmarks Compared against -
OShaugnesseys Reduced Portfolio Returns -
NYSE/SP Returns - Against the other
Sector-based Strategies
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STAT 682 Quantitative Financial Analytics
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• Scope
• Fund Investment Strategy
• Dataset Management Process
• Portfolio Selection Mechanism
• Benchmarks Back-testing the Funds Strategy
• Returns and Results
• Conclusion

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STAT 682 Quantitative Financial Analytics
STATISTICS
Returns and Results (Seed Capital 10k)
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STAT 682 Quantitative Financial Analytics
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Returns and Results (Seed Capital 10k)
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STAT 682 Quantitative Financial Analytics
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Returns Summary Statistics
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STAT 682 Quantitative Financial Analytics
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Annual Returns
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STAT 682 Quantitative Financial Analytics
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5 Year Rolling Returns
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STAT 682 Quantitative Financial Analytics
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10 Year Rolling Returns
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STAT 682 Quantitative Financial Analytics
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Returns Beating Ratios
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STAT 682 Quantitative Financial Analytics
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• Scope
• Fund Investment Strategy
• Dataset Management Process
• Portfolio Selection Mechanism
• Creating Benchmarks
• Back-testing the Funds Strategy
• Conclusion

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STAT 682 Quantitative Financial Analytics
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• Conclusion
• Advantages of the MFSS Investment Strategies
• Downside Risks
• Schumpeterian Theory of Growth
• Back-testing as Optimization of Hindsight
• Leverage as a matter of Preference

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Questions?