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Factor Performance Report Summary - Canada

Core Content

This report provides an analysis of the performance of 23 individual equity factors in the Canadian market as of January 2020. The factors are categorized into Value, Yield, Growth, Quality, Size, Volatility, and Momentum. Each factor's performance is evaluated relative to the overall market over different time frames, including 1 month, 3 months, 6 months, year-to-date, and annualized periods from 2014 to 2019.

Methodology

• Factor Portfolio Construction: For each factor, a single factor portfolio is created by sorting equities in descending order based on the factor and selecting the top 70% of the market by market cap. This ensures a consistent and comparable measure across all factors.
• Performance Measurement: The performance of each factor portfolio is measured against the entire market for each time frame.
• Adjustments:
  • For single-country regions (e.g., US), Sector Adjusted analysis is used.
  • For multi-country regions (e.g., Asia Pacific), Country and Sector Adjusted analysis is used.
  • These adjustments aim to isolate factor performance from sector or country-specific effects.

Key Factors and Their Definitions

Value Factors

• Book to Price: Ratio of book value to share price; a traditional measure of intrinsic value.
• Earnings Yield: Annual earnings per share divided by share price; measures company worth based on earnings.
• Cash Flow Yield: Annual cash flow per share divided by share price; includes depreciation and amortization.
• Sales to Price: Net sales per share divided by share price; considered less manipulable.
• EBITA to EV: EBITDA to Enterprise Value; measures profitability relative to total value.

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 of earnings growth 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; assesses potential for profitable growth.
• Low Gearing: Negative of debt to equity; indicates lower financial risk.
• Earnings Growth Stability: Negative of the standard deviation of earnings growth over 3 years; measures earnings consistency.
• Sales Growth Stability: Negative of the standard deviation of sales growth over 3 years; measures sales consistency.

Size Factors

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

Volatility Factors

• Market Beta: Slope coefficient from a regression of security returns against market returns; measures systematic risk.
• Daily Volatility 1Y: Annualized standard deviation of daily total returns over the last year.
• Volatility 3Y: Annualized standard deviation of total returns over the last 36 months.

Momentum Factors

• Momentum ST: Weighted average of the past 6 months of monthly 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.

Main Points

• The report offers a comprehensive view of how different factors have performed in the Canadian market.
• It uses a consistent methodology to construct and measure factor portfolios, ensuring fair comparisons.
• Factor performance is analyzed over multiple time frames, from short-term (1 month) to long-term (5 years annualized).
• Adjustments are made to separate factor impacts from sector or country impacts.
• Each factor is defined clearly, providing insight into its relevance and calculation method.

Key Information

• Style Analytics is an independent, global provider of factor analysis tools for investment professionals.
• The company has over 20 years of experience and serves more than 280 investment institutions in 30 countries.
• The report is designed to support objective and data-driven investment decisions by providing transparency on factor exposures.