Recently I’ve completed the following research report. The goal of this project was to find a way to successfully combine fundemental and technical data to generate portfolio weighting strategies that can allow investors to experience a higher level of return with less volatility than the index. Find attached a PowerPoint presentation, the Excel source file and the PDF written report. Find below an excerpt from the executive summary:
According to Standard & Poor’s “Index Versus Active Funds Scorecard” only 12.43% of actively managed US Equity funds have outperformed the S&P 500 Index over the 5 years ending June 30, 2008.
I took this fact as an ultimatum. My goal was to create a portfolio, which would be able outperform the major market indices over a 10 year period. In this spirit I set out to design an investment strategy, which seeks to generate significant alpha through the creation of a portfolio that can generate above average return while experiencing lower levels of volatility.
To achieve this objective I set out to design a unique investment strategy. I created a portfolio that can outperform the major market indices while experiencing lower levels of volatility by combining both technical and fundamental analysis. Fundamental analysis was used to create the “Risk Asset Portfolio” by identifying the most promising investments by analyzing the corporate health of the companies within the investment universe. On the other hand, technical analysis was used to perform market timing, resulting in smoother portfolio returns across the business cycle by dynamically allocating capital between the risky portfolio and cash.
The data for this project was aggregated from the Research Insight database . The data from the database was organized within Microsoft Excel wherein the analysis took place. Performance statistics relating to the performance of various market indices was compiled with data provided by Barron’s and Standard and Poor’s. The performance history of 3 months US Treasury securities was compiled with data provided by the Federal Reserve.
I have eliminated survivorship bias through the use of a sound, non-biased, stock selection strategy. I selected the 30 DJIA components at the end of 1998 as my investment universe. The portfolio was back tested from the beginning of Q1 1999 until the end of Q2 2009, making a total of 42 quarters (10.5 years). The model assumes that transaction costs and taxes are non-existent.
Analysis demonstrates that the portfolio is highly mean-variance efficient. The portfolio has demonstrated a 4.42% annualized rate of return while experiencing a standard deviation of only 3.58%. In contrast the S&P 500 experienced a negative annualized rate of return in this period of -2.72% while experiencing a much higher standard deviation of 8.65%. When observing the fundamental analysis in isolation from the technical analysis we can observe an efficiently constructed portfolio, which outperform the market benchmarks with less volatility. The risky asset portfolio experienced an annualized rate of return of 2.30% with a standard deviation 7.35%.
(Click the Picture to Access the PowerPoint File)
(Click the Picture to Access the Excel File)
(Click the Picture to Access the PDF Written Report File)
Is there any reason to believe your back-testing methodology has any predictive power for future results? I’m reminded of Michael James’ april-fools post here.
While I agree with you that no amount of back testing can give you predictive power resulting in “guaranteed” future results; I do however, believe, that combining fundemental analysis can allow one to outperform the market indicies by a decent margin (300 bps annually in my case) in the long term. My methodology has avoided survivorship bias by only using information available at the time the investment took place. No single position at any given time constituted more than 20% of the portfolio. Outperformance in my experiment has been driven mainly by avoiding poor performers rather than buying “home runs”.
I can figure out 10,000 different ways I could have made money over the last ten years. Making money over the next ten years is a little bit more difficult. Do you really think that you have discovered something that thousands of other investment anaylisis could not figure out? Also what happens to your modle when you include taxes and fees, because in the real world everyone has to pay both?