Date
18 October 2017
Driehaus’ price momentum approach would work well in a market where outperformers keep outperforming.  Photo: archinect.com
Driehaus’ price momentum approach would work well in a market where outperformers keep outperforming. Photo: archinect.com

Stock-picking: Spotting the stars with Driehaus strategy

Given the recent market conditions which saw strong stocks become even stronger, the strategy of picking outperforming counters assumes ever greater importance.

This week, we apply the Richard Driehaus approach in selecting the top-performing stocks.

Richard Driehaus is regarded as one of the 25 most influential mutual fund managers of the past 100 years. He founded Driehaus Capital Management in 1982 and his Chicago-based firm’s small and mid-cap funds have achieved notable returns over a ten-year period.

Simply speaking, Driehaus mainly used price momentum in picking stocks.

Target stocks have to be the best performers over a 12-month period as well as in last six months. Meanwhile, their full-year return cannot be lower than three-month return.

Excluding the bottom 25 percent of firms (as measured by market capitalization), we apply these selection criteria to all the listed shares in Hong Kong.

Using this strategy, we picked 10 stocks and built three portfolios, with varying stop-loss mechanisms and frequency of rebalancing.

Back-testing results showed all three portfolios generated far better cumulative return (between 159 percent and 338 percent) than the Hong Kong Tracker Fund (74 percent) during a ten-year period from 2007.

Meanwhile, the portfolio that rebalances four times a year is nearly double that of the one that rebalances twice a year.

The three portfolios have already generated returns of 40.9 percent, 39.5 percent and 37.7 percent over the first half of this year. This is far above the 18.8 percent return of the Hong Kong Tracker Fund, and shows the Driehaus strategy worked very well in the first six months.

This article appeared in the Hong Kong Economic Journal on July 20

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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