Craig McGee is a senior consultant at Morningstar Canada.
What we are looking for
I wanted to look at the Canadian market through a number of styles and perspectives. Using CPMS, I created a composite score by equally weighting four different investment strategies into a combined rank, then looked for stocks that made it into the top 20 among dividend-paying constituents of the S&P/TSX composite index.
The screen
These are the four styles:
- Growth and momentum – companies with strong short- and long-term earnings growth, high returns on capital and high price momentum;
- Low volatility – more predictable companies with low earnings- and price-volatility;
- Value and quality – companies with lower price-to-earnings and price-to-sales ratios along with more stable earnings that are growing;
- Income – companies with higher yields and dividend growth along with growing cash flow and higher profitability.
More about Morningstar
Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market.
What we found
By finding companies that could fit into a number of different styles, investors may benefit from an added level of diversification when some approaches are in favour while others are not.
To help gauge effectiveness, I used the CPMS back-test to select an equally weighted 20-stock portfolio for each strategy beginning Dec. 31, 1991. Each month, ranks were recalculated and any position that fell out of the top 30 per cent would be replaced.
Here is how each strategy fared on a total return basis: growth and momentum, 15.9 per cent; low volatility, 14.9 per cent; value and quality, 15 per cent; and income, 14.4 per cent. These compare with the S&P/TSX's total return of 8.8 per cent.