Date
17 October 2017
Given the stringent stock-picking yardstick by combing criteria used by numerous masters, a portfolio of just five stocks tends to do better than one comprising 10 stocks. Photo: Reuters
Given the stringent stock-picking yardstick by combing criteria used by numerous masters, a portfolio of just five stocks tends to do better than one comprising 10 stocks. Photo: Reuters

Stock selection by combining different masters’ approaches

In previous articles, we had created portfolios using yardsticks inspired by various legendary investors. This time, we decide to combine the stock-picking criteria of all these masters, covering areas like value, financial strength and momentum.

Among the criteria are:
1. Earnings growth of last year must be at least 15 percent
2. Return on equity has to be at least 10 percent
3. Current ratio needs to be at least one.
4. Net gearing shouldn’t be above 20 percent
5. Stock price should be above the 250-day moving average.

We then run three different portfolios, varying in the maximum number of stocks picked, rebalancing frequency and whether stocks that fail to meet the same set of criteria at each rebalancing period are sold during each rebalancing exercise or allowed to stay in the portfolio until they hit profit or loss stop targets.

Backtesting with 10 years of data, we found that the portfolio that picks a maximum of 5 stocks and adjusts its components quarterly by selling stocks that no longer meet the criteria performed best with a total return of 219 percent over the period, or an annual growth of 12.3 percent.

The approach also offers the advantage of a lower maximum drawdown (an indicator of the downside risk) of 11.3 percent, only about half that of Tracker Fund that tracks the benchmark Hang Seng Index, thus offering the highest risk-adjusted return.

The latest picks based on this approach are as follows:

1. Tencent Holdings (00700.HK)

2. CSPC Pharmaceutical Group (01093.HK)

3. Travelsky Technology (00696.HK)

4. Minth Group (00425.HK)

5. Man Wah Holdings (01999.HK)

This article appeared in the Hong Kong Economic Journal on May 25

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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