growth vs. value trading strategies

Growth vs. Value Trading StrategiesGlobal Asset allocation

John O’ReillySebastian Otero Barba

Nikolay PavlovFranck Violette

BA 453 – Global Asset Allocation & Stock Selection

AGENDA

Overview of Value and Growth

Historical Trends

Goal and The Approach to that Goal

The Datasets and Regression Results

Trading Strategy within a single class (small, mid, large, and all)

Trading Strategy among All

Summary



Growth and Value are two fundamental approaches:

Growth stock represent companies that have demonstrated better than average gains in earnings in recent years and are expected to continue delivering high levels of profit growth.

Value Stock represent companies that are currently out of favor in the marketplace and are considered bargain priced. Value stocks are typically priced much lower than stocks of similar companies in the same industry and may include stocks of newer companies with unproven track records.

Combining the two styles can help reduce portfolio volatility because each have outperformed the other at different phases of the business cycle.



Valuation Measure Value Growth

Dividend Yield Higher Lower

Price/Earnings Lower Higher

Price/Book Lower Higher

Price/Net Tangible Assets

Lower Higher

Price/Cash Flow Lower Higher


Historical Trends


Historical Trends

Growth and Value Stock have taken turns leading the market.


Goal and The Approach to that Goal

1. Goal:

To recommend a Trading Strategy for this year.

2. Approach:

Build predictive models for Total Returns of small, mid, large, all cap Value & Growth Indexes. Variable selection was top down. Selected variables have low correlation to each other. Variables were parsed based on a number of measures. Quadratic relationships were explored.

Mixed style – swap, long/short trading strategies within cap and among cap.

Test in Sample & Out of Sample.


The Datasets and Regression ResultsAll Caps Value Variables

All Cap Value

Variable Coefficient T-Stat

IT Govt Tres 0.007 5.31

U Mich Concumer Confidence Index % Change Squared -0.376 -1.53

U Mich Concumer Confidence Index % Change 0.141 3.66

Intercept 0.009 3.20

*All variables lagged 1 month


The Datasets and Regression ResultsAll Caps Growth Variables

All Cap Growth


IT Govt Tres 0.007 4.44

U Mich Concumer Confidence Index % Change 0.146 3.21




The Datasets and Regression ResultsLarge Cap Value Variables

Large Cap Value


Dividend Yield+ 87.8784 2.9923

Dividend Yield- -26.8095 -1.4751

Tbill^2 -2.2585 -1.6462

10 YR Tsry yield -3 month (annualized) -0.9000 -2.1745

(10Y-3M)^2 0.1138 1.3220

Wilshire Growth -0.0792 -1.7136

Intercept 0.4232 0.6133



The Datasets and Regression ResultsLarge Cap Growth Variables

Large Cap Growth


Dividend Yield+ 87.8784 2.992

Dividend Yield- -26.8095 -1.475

Tbill^2 -2.2585 -1.646

10 YR Tsry yield -3 month (annualized) -0.9000 -2.175

(10Y-3M)^2 0.1138 1.322

Wilshire Growth -0.0792 -1.714




The Datasets and Regression ResultsMid Cap Value Variables

Mid Cap Value


US IT Gvt 0.8204 0.1351

UM CC -ve 7.2774 3.3173

Value TR +ve 1 month lag -0.1569 -1.6304

Value TR -ve 1 month lag 0.4203 3.7026

Intercept 1.8047 4.5946


The Datasets and Regression ResultsMid Cap Growth Variables

Mid Cap Growth


3 mo TR 1 month lag 2.5130 3.1131

Aaa Corp Bond Yld -2.8679 -3.3067

Div Yld +ve 66.9563 2.2132

Aaa-Tbill +ve 1 Month lag 2.2358 2.8514

New Priv Housing Started +ve 17.0802 1.9922

New Priv Housing Started -ve -14.5994 -2.0760

Initial Claims Empl. -ve -15.6864 -1.3381

Value TR +ve 1 month lag -0.2618 -2.3911

Value TR -ve 1 month lag 0.3804 0.1112

Intercept 3.6653 2.1443


The Datasets and Regression Results Small Cap Value Variables

Small Cap Value


Div Yld+ 1 Month Lag 27.6838 1.0077

Div Yld- 1 Month Lag -14.7026 -0.7724

Baa-Aaa 1 Month Lag 0.5415 0.7720

DPI+ 1 Month Lag 26.1778 0.8159

DPI- 1 Month Lag 53.0174 0.7524

UM CC+ 1 Month Lag 1.7595 0.4086

UM CC- 1 Month Lag 9.1889 2.8377

U.S. IT Gvt 1 Month Lag 0.3826 2.7021

Value TR 1 Month Lag 0.1550 2.4375

Intercept -0.7113 -1.0676


The Datasets and Regression ResultsSmall Cap Growth Variables

Small Cap Growth


Div Yld+ 1 Month Lag 19.9367 0.2805

Div Yld- 1 Month Lag -9.9741 -0.2176

Baa-Aaa 1 Month Lag 0.2112 0.1707

US CPI 1 Month Lag -0.0100 -0.3811

DPI- 1 Month Lag 78.3167 0.6299

UM CC+ 1 Month Lag 7.0662 0.9308

UM CC- 1 Month Lag 8.9642 1.5509

U.S. IT Gvt 1 Month Lag 0.2851 1.1880

Growth TR 1 Month Lag 0.1073 1.6955

Intercept 1.4359 0.2790


The Datasets and Regression ResultsAdjusted R^2 Values

Adj R^2

All-Value 0.1214

All-Growth 0.0888

Large Cap Value 0.0118

Large Cap Growth 0.0202

Mid Cap Value 0.1062

Mid Cap Growth 0.0920

Small Cap Value 0.1164

Small Cap Growth 0.0134


The Datasets and Regression Results In Sample Direction Predictions

In Sample

% Of Direction of Value Returns Correctly

Predicted

% Of Direction of Growth Returns Correctly

Predicted

% of Max(Value Returns, Growth

Returns) Correctly Predicted

All 69.0% 66.8% 47.0%

Large Cap 69.2% 63.7% 47.8%

Mid Cap 63.7% 64.6% 57.1%

Small Cap 70.4% 59.1% 56.6%


The Datasets and Regression Results Out of Sample Direction Predictions

Out of Sample

% Of Direction of Value Returns

Correctly Predicted

% Of Direction of Growth Returns

Correctly Predicted

% of Max(Value Returns, Growth

Returns) Correctly Predicted

All 25.0% 20.8% 41.7%

Large Cap 66.7% 58.3% 75.0%

Mid Cap 70.8% 70.8% 41.7%

Small Cap 66.7% 54.2% 62.5%


Trading Strategy within a single class (small, mid, large, and all)

If the predicted growth and value return is less than the 30 Day T-Bill return, put 100% in T-Bills.

If the predicted growth or value return is greater than the 30 Day T-Bill return put 100% in either growth or value depending on which has the highest predicted return

Compare with buying and holding 100% value.

Compare with buying and holding 100% growth.


Trading Strategy within a single class (small, mid, large, and all) In Sample Results

In Sample Annualized Return Annualized STD

All Swap Strategy 17.1% 13.6%

All Value Buy/Hold 14.8% 14.5%

All Growth Buy/Hold -0.2% 17.2%

Large Swap Strategy 16.8% 14.7%

Large Value Buy/Hold 14.8% 13.9%

Large Growth Buy/Hold 16.4% 17.4%

Mid Swap Strategy 18.1% 15.5%

Mid Value Buy/Hold 15.2% 14.4%

Mid Growth Buy/Hold 13.6% 19.9%

Small Swap Strategy 19.2% 17.1%

Small Value Buy/Hold 15.74% 13.5%

Small Growth Buy/Hold 13.8% 22.5%


Trading Strategy within a single class (small, mid, large, and all) Out of Sample Results

Out Of Sample Annualized Return Annualized STD

All Swap Strategy -39.8% 15.4%

All Value Buy/Hold 2.8% 16.9%

All Growth Buy/Hold -33.8% 25.4%

Large Swap Strategy 2.6% 18.0%

Large Value Buy/Hold -5.8% 16.5%

Large Growth Buy/Hold -18.6% 22.0%

Mid Swap Strategy 8.0% 20.0%

Mid Value Buy/Hold 2.6% 26.2%

Mid Growth Buy/Hold -8.9% 26.2%

Small Swap Strategy 0.5% 19.1%

Small Value Buy/Hold 10.6% 19.0%

Small Growth Buy/Hold -1.7% 23.3%


Trading Strategy within a single class (small, mid, large, and all)Out of Sample Predictions

Predicted Dec '02 Monthly Return

Predicted Dec '02 Monthly Volatility

Suggested Allocation

All-Value 0.53% 20.99% -20.00%

All-Growth 1.74% 5.47% 120.00%

Large Cap Value -0.27% 16.00% 120.00%

Large Cap Growth -1.38% 25.41% -20.00%

Mid Cap Value 0.92% 24.09% 120.00%

Mid Cap Growth 1.82% 41.95% -20.00%

Small Cap Value 0.79% 12.82% 120.00%

Small Cap Growth 0.01% 40.45% -20.00%


Summary

Value versus Growth performance varies across capitalizations.

Implementing a simple trading strategy created larger in sample returns than buying and holding value or growth, but with higher volatility than value.

Better In Sample predictions than Out of Sample due to different market patterns in the late 90’s. Models prediction estimated to be representative for current market conditions.

A more complex trading strategy can be implemented by rebalancing a portfolio each period by using the expected returns and volatility during the next period for each asset class.

growth vs. value trading strategies

Documents

growth stock

cap value growth indexes

value stocks

goalthe datasets

predicted growth

regression resultsadjusted

high levels of profit

single class small