What are we looking for?
Better investment outcomes in the Canadian market by tracking companies with more predictable earnings and less volatile price activity.
The screen
Uncertainty has been mounting in local and international markets around rising valuations, currency volatility, low or negative bond yields and mixed messages around growth expectations. Many investors have been preparing for extended periods of turbulence, looking for ways to protect capital while still participating in upward-moving markets. Investment firms have been very successful attracting assets recently by launching low volatility funds, though most select and weight positions by using a single measure of trailing price volatility – beta, for example (a beta of less than 1.0 means that the security has been less volatile than the market).
Taking a broader approach, my colleague Lawrence Ullman and I wanted to search for potentially less volatile stocks based on a variety of measures. Specifically, we used Morningstar CPMS to find the top 20 Canadian stocks with the following metrics:
* market cap (the larger the better);
* historical earnings stability;
* five-year beta;
* annualized standard deviation of daily returns over the past year (this measures how much the security's returns have varied from its average return – lower values preferred);
* spread in analyst EPS estimates for the current year;
* three-month consensus earnings estimate revision;
* forward P/E and one-year total return.
Additionally, earnings stability must be in the best half of the database and the one-month price change cannot be negative. No more than three stocks a sector were allowed.
More about the Ullman Group
The Ullman Group is an independent provider of strategic private capital management services to high net worth individuals, corporations, endowments, charities and foundations.
What we found
We used CPMS to perform a back-test starting April 30, 2005, selecting an equally weighted portfolio of the top 20 qualifying stocks. Universe rankings were recalculated monthly and holdings would be replaced if their rank fell outside of the top 30 per cent or if price fell more than 15 per cent in a month.
Over the 10-year period, this strategy would have generated an annualized total return of 10.2 per cent compared with 7.9 per cent for the S&P/TSX composite total return index. At the same time, the strategy experienced considerably less volatility – annualized standard deviation was 37 per cent less than the index. Over the past five years, the strategy would have posted an annualized total return of 16.4 per cent compared with 7.6 per cent for the benchmark.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto.