Date
17 October 2018
Based on back testing results using past ten years’ data, an F-score based portfolio stands a good chance of helping investors beat the benchmark index. Photo: HKEJ
Based on back testing results using past ten years’ data, an F-score based portfolio stands a good chance of helping investors beat the benchmark index. Photo: HKEJ

Can F-Score strategy help beat the index?

In a previous column, I had talked about the Piotroski F-Score. Now, let’s discuss if it actually works.

The Piotroski F-score is a discrete score between 0-9 which reflects nine criteria used to gauge the strength of a firm’s financial position. The system was developed by a Chicago accounting professor named Joseph Piotroski.

F-Score looks into listed companies’ profitability, leverage, liquidity, operating efficiency, etc. For every criterion that is met the company is given one point. If it is not met, then no points are awarded. The points are then added up to determine the best value stocks.

To cap the number of stocks in the F-score portfolio to a manageable number, say 10, we are going to impose a number of additional criteria, including a market cap of at least HK$1 billion and a daily turnover of at least 100,000 shares.

We also introduce three options that vary in the risk level. Strategy A has no stop loss mechanism, strategy B has stop loss mechanism and will only accept stocks with price-to-book ratio within the 20th percentile, while strategy C also has stop loss mechanism but with a more relaxed price-to-book ratio limit capped at under two times.

The portfolio would see rebalancing on December 1 and June 1 as Hong Kong-listed companies announce earnings twice a year. And the backtest uses 10 years of past data.

The result shows, all three strategies would beat the performance of the Hang Seng index, yielding 18.5 percent, 10.8 percent and 15.3 percent respectively per annum, based on the back testing. By contrast, the index fund only posted an annual growth of 4.4 percent over the 10-year period.

Now, which of the three strategies would be the best?

The first strategy has generated the most absolute return, but it is also the most risky one. By contrast, the second strategy has the lowest risk but also the lowest return. Given this, the third strategy appears to be the best.

This article appeared in the Hong Kong Economic Journal on Jan. 19

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RC

Hong Kong Economic Journal chief economist and strategist

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