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Factor Performance Report Summary (UK, as of January 2020)

Introduction

This report provides an analysis of the performance of 23 individual equity factors in the UK market, covering various time frames from one month to five years. The goal is to assess how these factors have contributed to relative returns in different periods, enabling investment professionals to make informed decisions.

Methodology

• Factor Portfolio Construction: A single factor portfolio is created by sorting equity securities in a region in descending order based on a specific factor (e.g., Book to Price). The top 70% of the market by market capitalization is selected to form the portfolio.
• Performance Measurement: The performance of the factor portfolio is measured against the entire market for each time frame.
• Data Adjustments:
  • For single-country regions, data is adjusted using sector averages (Sector Adjusted).
  • For multi-country regions, data is adjusted using both country and sector averages (Country and Sector Adjusted).
• Cumulative Returns: Monthly returns are linked to provide cumulative performance measures across different time frames.
• Consistency: The same methodology is applied to all factors to ensure consistent and comparable results.

Core Content

The report includes the following sections:

• Last 1 Month
• Last 3 Months
• Last 6 Months
• Year to Date (YTD)
• 2018, 2017, 2016, 2015, 2014

Each section provides a visual representation of factor performance, with the note that the market cap used is the top 70% of the UK market.

Key Factors Analyzed

Value Factors

• Book to Price: Ratio of book value to share price. A successful measure of intrinsic value.
• Earnings Yield: Annual earnings per share divided by share price. Measures the company's ability to support shares with after-tax earnings.
• Cash Flow Yield: Annual cash flow per share divided by share price. Captures cash availability and includes depreciation, amortization, and provisions for deferred liabilities.
• Sales to Price: Net sales per share divided by share price. Considered less susceptible to manipulation but less comprehensive.
• EBITA to EV: EBITDA to Enterprise Value ratio. Enterprise Value is calculated as market cap + debt + preferred stock - cash and cash equivalents.

Yield Factors

• Dividend Yield: Annual dividend per share divided by share price.
• Shareholder Yield: Sum of Net Buyback Yield, Dividend Yield, and Net Debt Paydown Yield. Measures the proportion of company value distributed to shareholders.

Growth Factors

• Earnings Growth 5Y: Average annual growth rate of earnings over the trailing five years.
• Sales Growth 5Y: Average annual growth rate of net sales per share over the trailing five 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 trailing five years.

Quality Factors

• Return on Equity (RoE): Net income after preferred dividends divided by book value of common equity. A traditional measure of growth potential.
• Net Profit Margin: Net income divided by net sales. Measures the company's potential for profitable expansion.
• Low Gearing: Negative of debt to equity. Indicates higher quality due to lower debt burden.
• Earnings Growth Stability: Negative of the standard deviation of earnings growth over the most recent three years.
• Sales Growth Stability: Negative of the standard deviation of sales growth over the most recent three years.

Size Factors

• Market Cap: Market capitalization of the stock. The average size of a portfolio is the weighted average of the securities held.

Volatility Factors

• Market Beta: Slope coefficient from the regression of security returns against market returns. Calculated over 36 months, with β = 1 assumed if data is insufficient.
• Daily Volatility 1Y: Standard deviation of daily total returns over the last year, expressed as an annualized percentage.
• Volatility 3Y: Standard deviation of total returns over the last 36 months, expressed as an annualized percentage.

Momentum Factors

• Momentum ST: Measures the performance trend following using a 6-month memory of monthly returns, weighted by a decay ratio of 2/3.
• Momentum 12-1: Total return of the stock over the last 12 months, excluding the most recent month to avoid reversal effects.
• Forecast 12M Revisions: Difference between the number of upward and downward earnings forecast revisions, expressed as a percentage of the number of estimates. Calculated on a pro-rata basis from the next two annual reporting periods.

About Style Analytics

Style Analytics is an independent, global software provider for investment professionals. It offers objective and comprehensive factor analysis tools to asset owners, consultants, and asset managers. With over 20 years of experience and serving more than 280 investment institutions in 30 countries, the company provides insights into market, peer, and portfolio performance.

Global Reach

Style Analytics has offices in:

• London: +44 20 7467 5500
• Boston: +1 617 424 8080
• Montreal: +1 514 393 0101
• Melbourne: +613 9225 5040
• Tokyo: +81 3 5219 1279
• Paris: +33 173442897
• Shanghai: +86 21 28909032
• Sofia: +359 2 805 7126

The report is designed to provide investment professionals with a clear understanding of how different factors have performed over time, helping them validate and enhance their investment strategies.