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Factor Performance Report Summary - China

Core Content

This report provides an analysis of the performance of 23 individual equity factors in the Chinese market as of June 2018. It aims to offer investment professionals insights into how different factors have contributed to portfolio risk and return over various time periods. The report includes both historical performance data and a detailed explanation of the methodology used to calculate and compare factor returns.

Methodology

• Factor Portfolio Construction: For each factor, a single factor portfolio is created by sorting equity securities in the selected region by the factor value (e.g., Book to Price) and selecting the top 50% of securities by market cap. This process ensures that the portfolio represents the "top half" of the market based on the specific factor.
• Performance Measurement: The performance of each factor portfolio is measured relative to the entire market for different time frames, including 1 month, 3 months, 6 months, year-to-date, and annual periods.
• Data Adjustments:
  • For single-country regions (e.g., US), Sector Adjusted analysis is used, where individual security data is adjusted to reflect sector averages.
  • For multi-country regions (e.g., Asia Pacific), Country and Sector Adjusted analysis is applied, where data is adjusted to reflect both country and sector averages.
• Consistency: The same process is applied to all factors, allowing for consistent and comparable performance evaluations across different time frames and regions.

Main Factors and Their Definitions

Value Factors

• Book to Price: Ratio of book value to share price; measures intrinsic value.
• Earnings Yield: Annual earnings per share divided by share price; reflects earnings support.
• Cash Flow Yield: Annual cash flow per share divided by share price; includes depreciation and provisions.
• Sales to Price: Net sales per share divided by share price; less susceptible to manipulation.
• EBITA to EV: EBITDA divided by Enterprise Value; measures operating performance.

Yield Factors

• Dividend Yield: Annual dividend per share divided by share price; reflects dividend income.
• Shareholder Yield: Sum of Net Buyback Yield, Dividend Yield, and Net Debt Paydown Yield; measures value distribution to shareholders.

Growth Factors

• Earnings Growth 5Y: Average annual growth rate of earnings over the past 5 years.
• Sales Growth 5Y: Average annual growth rate of net sales per share over the past 5 years.
• Forecast Growth 12M: Consensus forecast growth of earnings over the next 12 months.
• Dividend Growth 5Y: Average annual growth rate of dividends over the past 5 years.

Quality Factors

• Return on Equity: Net Income after preferred dividends divided by book value of equity; measures profitability.
• Net Profit Margin: Net income divided by net sales; reflects profitability and expansion potential.
• Low Gearing: Negative of debt to equity; indicates lower financial risk.
• Earnings Growth Stability: Negative of the standard deviation of earnings growth over the past 3 years; measures earnings consistency.
• Sales Growth Stability: Negative of the standard deviation of sales growth over the past 3 years; measures sales consistency.

Size Factors

• Market Cap: Market capitalization of the stock; used to determine portfolio size statistics.

Volatility Factors

• Market Beta: Slope coefficient from a regression of security returns against market returns; measures sensitivity to market movements.
• Daily Volatility 1Y: Standard deviation of daily total returns over the last year, annualized.
• Volatility 3Y: Standard deviation of total returns over the last 36 months, annualized.

Momentum Factors

• Momentum ST: Weighted average of the last 6 months of monthly total returns; measures performance trend following.
• Momentum 12-1: Total return over the last 12 months excluding the most recent month; avoids reversal effects.
• Forecast 12M Revisions: Difference between upward and downward earnings forecast revisions over the next 12 months, expressed as a percentage of total estimates.

Key Information

• The report is produced by Style Analytics, a global provider of factor analysis tools for investment professionals.
• Style Analytics has over 20 years of experience and serves over 280 investment institutions across 30 countries.
• The methodology ensures objective and comprehensive factor analysis by isolating factor impacts from sector and country effects.
• The performance data is presented in charts for different time frames and is adjusted for sector and country to maintain accuracy.
• The report is useful for investment decision-making, as it provides transparency into the systematic drivers of risk and return.

Conclusion

The report offers a detailed breakdown of the performance of various equity factors in the Chinese market, using a consistent and transparent methodology. It highlights the relative returns of each factor over different time periods, allowing investors to make informed decisions based on historical trends and market conditions. The inclusion of multiple factor categories (value, yield, growth, quality, size, volatility, and momentum) ensures a well-rounded view of market dynamics.