Butterwire’s Global Large Cap Index of “Interesting and Recession-Resilient” Research Candidates (available and updated daily in the Markets section of the platform) is up 4% relative to MSCI ACWI year-to-date, while that of “Potential Short” Candidates is down -13%. While a 17% long-short spread looks at first flattering, it is based on indices that are re-balanced on the first day of each month, which typically means high name turnover and therefore transaction costs; for instance, 57% of the “interesting” candidates included in the index at the start of the year have since been replaced.
In this note, we have instead looked back at the list of candidates as per 31/12/2018 (available for download in the Tools section of the platform) and analysed how the names fared year-to-date.
To keep the note short, we have focused on two categories of stocks: that of “Interesting” candidates with high “Recession-Resilience” scores (ca. 15% of the stock universe covered), and that of “Potential Short” candidates (ca. 5% of the universe). Globally, these indices are up 5% and down -8% respectively relative to the ACWI benchmark, delivering a long-short spread of 13% year to date.
These returns also compare favourably to the -1% generated on average by the 70% of the universe that were not deemed “Interesting” by the engine at the time and labelled “better odds elsewhere” as a result. The overall picture is confirmed by looking at win rates as they reached 54% for interesting candidates and 35% for potential shorts vs. 44% for the “better odds elsewhere”.
Regionally, the performance for Emerging Markets stocks on the long side (+1.8%) and that of Europe on the short side (-2.6%) were the weakest. Listed below are the Top 10 contributors and detractors for each.
Focusing on the Top Detractors in the above lists (bottom 10 names), over half of the underperformance shown could have been avoided as the engine soon provided the strongest signal to cut one’s loss: an “exit” alert for the long candidates and a “green flag” for the shorts. As for the two names (Vifor and Inmarsat) who weren’t “green-flagged”, the technical breakouts flagged in early March provided a very strong indication that the positions stood to make further loss.
Finally, looking back at the list published 1-August-2018 consisting of 20 Large Cap European names to consider as market returns flat-line, the win rate over 1 year for these 20 names stands at 80% with an average 1-year excess return of 11%. Note that the engine sent timely warning signals on each of the 4 names that have underperformed, potentially avoiding most (ca. 2/3) of the subsequent share price drop (Sainsbury started getting “Exit” alerts from December 2018, Ipsen and Amadeus received “Check Thesis” alerts from November 2018 and Thales from January 2019).