Stock selection for long-term investment by modern approach to quality investing in the Nordics: High and persistent ROIC as a proxy for superior return
Bashilov, Vitalii (2020)
Bashilov, Vitalii
2020
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:amk-202005128565
https://urn.fi/URN:NBN:fi:amk-202005128565
Tiivistelmä
This thesis examines performance of a quality investing strategy based on stock selection by using Return On invested Capital (ROIC) as a sorter to form a portfolio of top ten percent of the companies in the ranking by this metric in the Nordic market between the years 2014 and 2019. Additionally, it tests whether there is any additional return when investing only in companies that were in top 10 percent of the ranking persistently for three years. Capital Asset Pricing Model (CAPM) and Fama-French three-factor model are employed to explain whether returns are captured by the model or not, and if any statistically significant alpha, return not captured by the models’ factors, is generated. Additionally, cumulative and annualized returns of suggested strategies and the market represented by benchmark index OMX Nordic 120 are compared to find out if former can outperform the latter. Such risk metrics as Standard Deviation and Sharpe ratio of the portfolios based on the researched strategies and the market index are compared to determine whether superior performance results from excessive risk-taking.
The study reveals that the strategy based on investing in top 10th percentile of the ranking by last financial year ROIC would yield higher cumulative and annualized returns in the long run compared to the strategy where only top 10th percentile companies with persistently high ROIC at 3 years level are invested in. Further, both of the researched strategies show lower annualized Standard Deviation and higher Sharpe ratio compared to the market. Both strategies yielded statistically significant alphas in both CAPM and Fama-French three factor model, while strategy that uses last financial year ROIC as a sorter performed better in the long run in comparison to the one that incorporates 3 years persistence in this metric.
The study reveals that the strategy based on investing in top 10th percentile of the ranking by last financial year ROIC would yield higher cumulative and annualized returns in the long run compared to the strategy where only top 10th percentile companies with persistently high ROIC at 3 years level are invested in. Further, both of the researched strategies show lower annualized Standard Deviation and higher Sharpe ratio compared to the market. Both strategies yielded statistically significant alphas in both CAPM and Fama-French three factor model, while strategy that uses last financial year ROIC as a sorter performed better in the long run in comparison to the one that incorporates 3 years persistence in this metric.