Date
27 May 2017
During the 15-month-long market rally in Hong Kong, there were only 10 trading days when more than 70 percent of the stocks posted gains simultaneously on the same day. Photo: Reuters
During the 15-month-long market rally in Hong Kong, there were only 10 trading days when more than 70 percent of the stocks posted gains simultaneously on the same day. Photo: Reuters

How to build a portfolio with market leaders

Breaking the 25,000-points mark recently, Hong Kong’s Hang Seng Index has jumped 36 percent since February 12 last year, when the benchmark tumbled to a low of 18,319 points. For investors, the gain exceeds 40 percent when dividends are factored in.

However, market strength has been far from broad-based.

During the 15-month-long market rally, there were only 10 trading days when more than 70 percent of the stocks posted gains simultaneously on the same day.

Often, less than half the stocks showed gains even when the benchmark index advanced.

Now, how should we deal with this new norm — market gains led by a small number of outperformers — in terms of portfolio strategy?

Well, we have built up three portfolios with these so-called market leaders, by selecting the top ten performers of Hang Seng Composite Index constituents (a more comprehensive index that covers the top 95th percentile of the total market capitalization of firms listed on the main board) over past one year.

Other thresholds include a minimum market value of HK$1 billion and daily transaction volume of at least one million shares.

A 10 percent weighting is given to each stock. We then adjust the portfolio on a quarterly basis based on the same sets of criteria.

Major difference of the three lies in stop-loss mechanism chosen.

We found from back testing that such approach would have generated a cumulative return of about 300 percent to 470 percent over last 11 years, far outstripping the market return.

If the time period is restricted to the first quarter of this year, the approach also proved rewarding, yielding around 18-20 percent gain, almost double the market return.

This article appeared in the Hong Kong Economic Journal on May 11

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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