Performance of Investing Strategies in the Hong Kong Stock Market

Transcription

1 Value Partners Center for Investing Performance of Investing Strategies in the Hong Kong Stock Market September 18, 2012 Sponsored by:

2 Performance of Investing Strategies in the Hong Kong Stock Market Introduction We showed in our previous newsletter that value investing strategies work well in the Hong Kong stock market. This report extends our studies to examine the performance of other investing strategies in this market and how their performances compare with value investing strategies. We find that the two strategies based on past tested in this study provided investors with good future. However, portfolios consisting of stocks in the top 20th percentile based on our value measurements consistently outperformed the Hang Seng Index (HSI) at larger magnitudes than did these two strategies in the past 22 years. Data Sample and Measures Our source of data on the daily total return index of each stock and the HSI and the monthly prices, total return index and market value of each stock is Datastream. We obtain data on total assets, total liability, net income, depreciation, total number of shares outstanding, earnings per share from Worldscope. Exchange traded funds (ETFs) and warrants are excluded from our study. We delete the bottom one-third of stocks based on their market value in order to eliminate any penny stocks that filed for bankruptcy each month. Our portfolio formation focuses on the period between January 1990 and December 2011, which is a reasonably long time period. The value of a stock is measured by three measures of a stock s value the dividend yield (DY), earnings-to-price ratio (EP) and book-to-market ratio chosen in our previous newsletter. The other measures we consider here are the market capitalization (size), closing price, total volatility and idiosyncratic volatility, past one-month and past six-month cumulative (momentum). The performance of investing strategies At the end of each month, we sort stocks into five portfolios based on four measures in that month. These measures are market capitalization, total volatility, past one-month and past six-month (momentum). We calculate both equal- and value-weighted forwardlooking one-month of a portfolio. The equal-weighted of a portfolio is the simple average of all stocks in the portfolio whereas we calculate the value-weighted of a portfolio by weighting each stock s based on its market capitalization. In this way, the five portfolios are rebalanced monthly according to the stocks thee value measures in the 22 years. We then subtract the equal- and value-weighted of each portfolio from the HSI. The difference in is the outperformance of each portfolio against the HSI, namely the excess return. The results for portfolios sorted by price are similar to those for portfolios sorted by market capitalization. The total volatility of a stock is highly correlated with its

3 idiosyncratic volatility. We therefore report the performance of portfolios sorted by market capitalization, total volatility, one-month and momentum (six-month ) in Table 1. We find that the equal-weighted portfolios with high past one- and six-month outperformed stocks with low one- and six-month. These two strategies generated higher than the HSI although not in a significant way. The portfolio with the highest one-month also generated market-adjusted excess (alpha) in CAPM, but not the portfolio with the highest six-month. The zero-cost portfolios that long the portfolios with the highest one- and six-month and short the portfolios with the lowest one- and six-month generated of 1.42%-1.52% and market-adjusted excess (alpha) of 1.74%-1.80% in CAPM per month over the period. However, we do not find any significant results for market capitalization, closing price, total volatility, and idiosyncratic volatility. In addition, we find similar results for three- and six-month holding periods. But when the investment period is nine months, the momentum strategy did not outperform the HSI. Table 1: Investing Strategies Portfolio formation period from January 1990 to December 2011 Rank Market Capitalization Total Volatility One-Month Returns Momentum Returns Alpha Returns Alpha Returns Alpha Returns Alpha L(1) 1.07% -0.24% 0.06% 0.07% -1.23% -0.36% 0.48% -0.82% -0.85% 0.26% -1.04% % (2.02) (-0.57) (0.16) (0.63) (-2.98) (-3.77) (0.71) (-1.83) (-1.92) (0.40) (-2.31) (-2.29) % -0.56% -0.30% 1.04% -0.25% 0.03% 0.17% -1.13% -0.90% 0.16% -1.14% % (1.42) (-1.43) (-0.80) (2.44) (-0.89) (0.14) (0.33) (-3.17) (-2.69) (0.33) (-3.21) (-2.73) % -0.62% -0.38% 1.18% -0.12% -0.02% 0.55% -0.74% -0.46% 0.84% -0.45% % (1.37) (-1.83) (-1.22) (2.21) (-0.37) (-0.06) (1.26) (-2.48) (-1.79) (1.84) (-1.46) (-0.69) % -0.47% -0.28% 1.19% -0.11% -0.11% 1.36% 0.06% 0.40% 1.28% -0.02% 0.31% (1.70) (-1.59) (-1.01) (1.88) (-0.27) (-0.29) (3.05) (0.17) (1.32) (2.83) (-0.05) (1.00) H(5) 0.99% -0.30% -0.09% 0.78% -0.53% -0.56% 1.90% 0.60% 0.89% 1.78% 0.47% 0.79% (2.39) (-1.73) (-0.65) (1.05) (-0.97) (-1.03) (3.50) (1.37) (2.15) (3.19) (1.02) (1.79) H-L -0.07% -1.37% -0.15% 0.71% -0.61% -0.20% 1.42% 0.11% 1.74% 1.51% 0.20% 1.80% (-0.21) (-2.49) (-0.44) (1.03) (-1.15) (-0.38) (2.99) (0.14) (3.85) (2.86) (0.26) (3.51) Note: Adjusted t-statistics are in parentheses We do not find similar results for value-weighted portfolios sorted by the above past return measures. It is worth noting that the portfolio with the highest price and the one with the largest number of stocks actually significantly underperformed the HSI when we value-weight the portfolio. Value-based strategies outperform other strategies In figure 1, we examine the cumulative payoff in dollar terms when we invest $1 in the portfolios with the highest values of our value and other measures with one-month portfolio rebalancing. We also compare this payoff with the cumulative payoff from a $1 investment in the HSI. The value measures are the book-to-market ratio, earnings-to-price ratio and dividend yield, the values of which were reported in our previous newsletters. We find that $1 invested in the portfolios with the highest dividend yield, earnings-to-price ratio and cash flow-to-price ratio respectively generated $443.8, $421.3 and $137.2 in a 22-year period with monthly rebalancing

4 while the HSI only generated $14.5. The portfolios with the highest market capitalization, closing price, total volatility, idiosyncratic volatility, past one-month and momentum generated $7.42, $7.29, $1.18, $1.23, $54.0, and $35.61 respectively. These results suggest that investment strategies based on our value measures and past one- and six-month outperformed the HSI while the other strategies did not. In particular, the value investing strategies based on a stock s earnings-to-price ratio and dividend yield rewarded investors with 29 times that of the HSI and outperformed the two strategies based on past by over eight times, while the investing strategy based on the book-to-market ratio outperformed these two strategies by 2.5 times. 600 Cumulative Payoff of Investing Strategies PAYOFF 一月 -90 十月 -90 七月 -91 四月 -92 一月 -93 十月 -93 七月 -94 四月 -95 一月 -96 十月 -96 七月 -97 四月 -98 一月 -99 十月 -99 七月 -00 四月 -01 一月 -02 BOOK TO MARKET EARNINGS TO PRICE DIVIDEND TO PRICE PAST RETURN PAST SIZE PAST PRICE MOMENTUM TOTAL VOLATILITY IDIOSYNCRATIC VOLATILITY HANGSENG 十月 -02 七月 -03 四月 -04 一月 -05 十月 -05 七月 -06 四月 -07 一月 -08 十月 -08 七月 -09 四月 -10 一月 -11 十月 -11 Figure 1. Cumulative Payoff of $1 invested in the Hang Seng Index and in Portfolios with the Highest Values of a Stock s Value Measures and Other Measures with One-Month Portfolio Rebalancing in the Hong Kong Stock Market.

5 Conclusion We find that the two investing strategies based on past tested in this study generated good for investors but did not significantly outperform the Hang Seng Index in the past 22 years. On the contrary, our value investing strategies based on the same three measures outperformed the Hang Seng Index and other investing strategies in the past 22 years. In particular, the two value investing strategies rewarded investors eight times more than what these two investing strategies based on past did over the past 22 years in the Hong Kong stock market. About Value Partners Center for Investing ( The Value Partners Center for Investing of the Hong Kong University of Science and Technology Business School is an academic and intellectual center supporting research and training on investing with an emphasis on China and Hong Kong financial markets. It aims to promote Hong Kong's role as the regional asset management center. The center is sponsored by Value Partners Group Limited. About Value Partners Group Limited ( Value Partners is one of Asia s largest asset management firms. Since its establishment in 1993, Value Partners has been a dedicated value investor with a focus on the Greater China region. The Group manages absolute return long-biased funds, long-short hedge funds, exchange-traded funds, quantitative funds, and private equity funds for institutional and individual clients in Asia Pacific, Europe and the United States.

6 Author Contact Information Dr. Samuel Xin Liang Associate Director Value Partners Center for Investing Tel: Mobile: Fax: Supporting Researcher: Ms. Cheuk, Man Yin