Part of quant investing is always being on the look out for better metrics and systems that enhance performance. Today I want to look at a simple improvement to the value metric shareholder yield. I’ll look at this in the context of the quant index replication strategy I posted on here.
First, lets look at shareholder yield in more detail. Recently there has been some interesting discussion on the level of buybacks, as a percentage of market cap, and how strong a conviction by management that represents. The idea being that the higher percentage of shares a company is buying back, the more conviction management has on the value of the company, and thus leading to better stock performance. The best analysis of the topic is here. The analysis going back to 1987 shows two key things; the largest buybacks (greater than 5% of market cap) are done at cheaper valuations and this leads to better performance over the following year.
The large stock shareholder yield quant value strategy is a big improvement on the traditional indices. But maybe we can do better armed with this new information on the level of buybacks. I’ll take the original large stock SHY value strategy and compare it to a new version which only buys the large cap stocks sorted by SHY if the buyback yield is greater than 5%. We’ll go back to Jan 1999 and run the backtest through yesterday’s market close. First, the performance for the original large stock SHY strategy.
Pretty darn good, 16.44% per year since 1999 with a Sharpe of 0.75 and Sortino of 1.06. Now lets add the filter that only buys stocks with a buyback yield greater than 5%.
Even better as the research suggested. 17.59% per year since 1999 with a Sharpe of 0.80 and a Sortino of 1.17. That a 1.1% per year return enhancement with an improvement in risk adjusted returns as well for a very simple addition to an already powerful strategy.
In short, screening for high conviction buybacks is a powerful addition to a large cap shareholder yield value strategy.
2 Comments
steve · November 4, 2015 at 10:58 am
Can you post the list of the top 25/50 stocks used to implement this strategy?
paul.novell@gmail.com · November 4, 2015 at 11:05 am
Sure. Top 25 as of yesterday’s close: KLAC, ADT, HLF, MOS, HES, BBBY, CPN, VIAB, MSI, CF, HOT, JNPR, NAVI, LYB, SNI, AGO, OII, CBS, ITW, ASH, HPQ, XRX, FLR, STX, TDC.
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