4. Empirical Results
4.2 Explanation of the Divergence of the Two Portfolios
4.2 Explanation of the Divergence of the Two Portfolios
In this section, I am going to discuss why Portfolio A and B, the No.1 and No.2 market value stocks, perform totally different results in my investigation. The key explanation would be whether the stocks are upgraded or downgraded in terms of market value ranking.
Portfolio B has more upgraded stocks. However, Portfolio A has no upgraded but only
“downgraded” stocks, given they are already ranked as the top 1 cap.
Portfolio A is largely underperformed because the share prices of MSFT slumped by over than 30% during the first half year of 2000 (Table 4-2). The holding stock then switched to GE by 30/Jun/2000 which just replaced MSFT as the largest cap firm. However, GE’s share price also saw a huge drop by more than 40% from Jun/2000 to Jun/2002 even though it is still the stock with largest market values. The rebalance on Jun/2002 then did another switch to MSFT from GE as MSFT was back to top. But unfortunately, MSFT didn’t work in the following 12 month that the share prices declined by more than 20% during Jun/2002~Jun/2003. MSFT lost its market cap crown therefore the rebalance brought GE back into the portfolio again on Jun/2003. Nevertheless, GE didn’t create much excess return during 2003~2005. Portfolio A finally saw excess return after switched to XOM by Jun/2006 but still suffered from collapse in financial crisis. The rebalance switches between XOM and AAPL during 2012~2103 is another bad strategy to draw down the performances. Buying AAPL on Dec/2013 is a turnaround of performance with excess total return of 26.4% in 2014, but not good enough to offset the impacts from the previous trades when looking at the annualized total return including 20 years, 10 years and 5 years.
Portfolio B, on the contrary, enjoys several sweet points that contribute lots to performances (Table 4-3). The switch action that buys MSFT and sells GE by end-2008 is so successful that generates excess returns by 33.3% in 2009. This strategy also achieves
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Jun/2012 and switching it to XOM after Jun/2012. Buying GOOGL on Jun/2015 is another key contributor that generates excess return by 30%.There were a few of periods that Portfolio B delivers relatively poor performance such as Year 2000 (total return -53.79%, negative excess return -43.11%) due to switch to INTC by Jun/2000, which was plunged by 55% in the next 6 month. It is underperformed during 2007~2008 that attributed to the holdings of GE, which is downgraded from Portfolio A by end-Jun 2006. The performance in 2014 is also very weak with negative excess return of -19.94% because of the share holdings of XOM, which was kicked out from Portfolio A by end of 2013.
We found the loser stocks in Portfolio B have something in common. Most of them are downgraded from Portfolio A, which means their share price movements are down trending from the peak. On the contrary, the winners that attribute remarkable excess returns to Portfolio B are usually those upgraded from a lower rank, implying a positive up trend of share prices. These “winner” stocks perform so well that offset the impacts of the “losers”
on a mid-to-long-term basis. The concept is like Momentum strategy, which is typically implemented by buying past winners and selling past losers.
I classify the total 7 names that have been selected into Portfolio B in different periods by ranking upgrades or downgrades in Table 4-4. We find that only INTC is the one classified into “upgraded” stocks but delivers relatively negative excess returns, while the others all contribute to beautiful outperformances. As for those “downgraded” stocks, most of them have poor performances but only GE in 1999~1H00 and AAPL in 2H13 generate positive excess returns. The accumulated excess returns of the all “Downgraded” stock group are negative at -34% in total, which looks very bad comparing with that (+121.77%) of “Upgraded”
group.
The large deviation of total accumulated excess returns between Upgraded and
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國立 政 治 大 學
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N a tio na
l C h engchi U ni ve rs it y
Downgraded stocks indicates the ranking up/downgrade plays a key role in Portfolio’s performances. The underperformance of Portfolio A reflects the fact that the top market value stocks usually have no space to move forward but downgrade. The long-term reversal has been described as Momentum Crash in many studies, meaning the momentum strategy suffers from occasional drawdowns. Some literatures investigating the momentum crash argue that theses occurrences are concentrated on the market rebound. Because the momentum strategy is constructed based on the stocks’ past returns, it is likely to perform negatively by buying past winners and short past losers if the portfolios are formed after the market decline. I do find Portfolio A reports negative returns during Year 2000-2002, Year 2008-2009, when the market is reversed. But it also delivers extremely negative excess returns during Year 2012-2013 when the market (S&P 500) has been trending up; whist Portfolio B generates strong positive returns at the same time. The argument cannot explain why the No.1 market cap stock “cashes” during many of the observing periods but No.2 stock has always been a winner. I will discuss this issue from other point of views in the next section.
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Table 4-2: Stocks’ 6-mth Returns of Portfolio A
This table reports the different holding stock’s 6-mth returns of Portfolio A. The excess returns are the stocks’ 6-mth returns subtracting by that of S&P 500 index fund.
Hol di ng
Return GE MSFT XOM AAPL S&P 500
Index Fund
1H97 GE 31.48 11.89 31.48 52.95 25.00 (31.74) 19.59
2H97 GE 12.88 2.97 12.88 2.27 (0.10) (7.88) 9.91
1H98 GE 23.85 7.11 23.85 67.70 16.65 118.56 16.74
2H98 GE 12.24 3.41 12.24 27.97 2.45 42.70 8.83
1H99 MSFT 30.06 18.96 10.78 30.06 5.47 13.12 11.10
2H99 MSFT 29.45 22.24 36.95 29.45 4.46 122.00 7.21
1H00 MSFT (31.48) (30.39) 2.75 (31.48) (2.56) 1.88 (1.09)
2H00 GE (9.55) 0.15 (9.55) (45.78) 10.75 (71.60) (9.70)
1H01 GE 1.69 8.24 1.69 68.30 0.50 56.30 (6.55)
2H01 GE (17.78) (11.01) (17.78) (9.25) (10.02) (5.80) (6.77)
1H02 GE (27.52) (14.10) (27.52) (17.43) 4.12 (19.09) (13.42)
2H02 MSFT (5.48) 5.36 (16.18) (5.48) (14.61) (19.13) (10.84)
1H03 MSFT (0.81) (11.46) 17.78 (0.81) 2.78 33.00 10.65
2H03 GE 8.02 (5.96) 8.02 6.75 14.17 12.12 13.98
1H04 GE 4.58 1.66 4.58 4.35 8.32 52.27 2.92
2H04 GE 12.65 6.80 12.65 3.96 15.42 97.91 5.85
1H05 GE (5.07) (3.67) (5.07) (7.04) 12.11 14.32 (1.40)
2H05 GE 1.15 (3.32) 1.15 5.27 (2.26) 95.30 4.47
1H06 GE (5.96) (8.14) (5.96) (10.90) 9.22 (20.34) 2.18
2H06 XOM 24.91 13.60 12.89 28.15 24.91 48.14 11.31
1H07 XOM 9.46 3.24 2.88 (1.31) 9.46 43.85 6.22
2H07 XOM 11.70 14.51 (3.16) 20.80 11.70 62.31 (2.81)
1H08 XOM (5.93) 6.54 (28.00) (22.72) (5.93) (15.47) (12.47)
2H08 XOM (9.42) 20.07 (39.30) (29.33) (9.42) (49.03) (29.49)
1H09 XOM (12.43) (14.32) (27.65) 22.27 (12.43) 66.88 1.89
2H09 XOM (2.46) (23.66) 29.10 28.23 (2.46) 47.96 21.20
1H10 XOM (16.31) (8.93) (4.69) (24.51) (16.31) 19.36 (7.38)
2H10 XOM 28.12 6.29 26.84 21.30 28.12 28.24 21.83
1H11 XOM 11.30 6.35 3.12 (6.84) 11.30 4.06 4.95
2H11 XOM 4.15 9.05 (5.04) (0.15) 4.15 20.65 (4.90)
1H12 XOM 0.96 (7.49) 16.36 17.84 0.96 44.20 8.45
2H12 AAPL (8.87) (13.50) 0.72 (12.68) 1.15 (8.87) 4.63
1H13 AAPL (25.49) (38.14) 10.48 29.34 4.39 (25.49) 12.65
2H13 XOM 12.01 (3.12) 20.87 8.29 12.01 41.48 15.13
1H14 AAPL 15.95 9.98 (6.24) 11.47 (0.51) 15.95 5.97
2H14 AAPL 18.78 13.76 (3.84) 11.39 (8.17) 18.78 5.02
1H15 AAPL 13.63 13.48 5.14 (4.95) (10.01) 13.63 0.15
2H15 AAPL (16.08) (15.12) 17.24 25.66 (6.31) (16.08) (0.96)
1H16 AAPL (9.18) (11.93) 1.06 (7.77) 20.26 (9.18) 2.75
2H16 AAPL 21.15 14.44 0.38 21.44 (3.71) 21.15 6.71
1H17 AAPL 24.35 16.17 (14.53) 10.93 (10.56) 24.35 8.17
6-mth Return (%) Portfolio A
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Table 4-3: Stocks’ 6-mth Returns of Portfolio B
This table reports the different holding stock’s 6-mth returns of Portfolio B. The excess returns are the stocks’ 6-mth returns subtracting by that of S&P 500 index fund.
Hol di ng
Re turn KO MSFT GE INTC XOM AAPL GOOGL S&P 500
Index Fund
1H97 KO 29.22 9.63 29.22 52.95 31.48 8.31 25.00 (31.74) NA 19.59
2H97 KO (1.93) (11.84) (1.93) 2.27 12.88 (0.93) (0.10) (7.88) NA 9.91
1H98 KO 28.21 11.47 28.21 67.70 23.85 5.52 16.65 118.56 NA 16.74
2H98 MSFT 27.97 19.14 (21.64) 27.97 12.24 59.95 2.45 42.70 NA 8.83
1H99 GE 10.78 (0.32) (7.46) 30.06 10.78 0.37 5.47 13.12 NA 11.10
2H99 GE 36.95 29.74 (6.05) 29.45 36.95 38.34 4.46 122.00 NA 7.21
1H00 GE 2.75 3.84 (1.39) (31.48) 2.75 62.41 (2.56) 1.88 NA (1.09)
2H00 INTC (55.03) (45.33) 6.09 (45.78) (9.55) (55.03) 10.75 (71.60) NA (9.70)
1H01 XOM 0.47 7.02 (26.15) 68.30 1.69 (2.70) 0.50 56.30 NA (6.55)
2H01 MSFT (9.25) (2.48) 4.78 (9.25) (17.78) 7.52 (10.02) (5.80) NA (6.77)
1H02 MSFT (17.43) (4.01) 18.77 (17.43) (27.52) (41.91) 4.12 (19.09) NA (13.42)
2H02 GE (16.18) (5.34) (21.71) (5.48) (16.18) (14.78) (14.61) (19.13) NA (10.84)
1H03 GE 17.78 7.13 5.86 (0.81) 17.78 33.65 2.78 33.00 NA 10.65
2H03 MSFT 6.75 (7.23) 9.35 6.75 8.02 54.01 14.17 12.12 NA 13.98
1H04 MSFT 4.35 1.43 (0.53) 4.35 4.58 (13.88) 8.32 52.27 NA 2.92
2H04 MSFT (6.44) (12.29) (17.51) 3.96 12.65 (15.25) 15.42 97.91 NA 5.85
1H05 XOM 12.11 13.51 0.26 (7.04) (5.07) 11.24 12.11 14.32 52.58 (1.40)
2H05 XOM (2.26) (6.73) (3.45) 5.27 1.15 (4.07) (2.26) 95.30 41.04 4.47
1H06 XOM 9.22 7.04 6.72 (10.90) (5.96) (23.88) 9.22 (20.34) 1.08 2.18
2H06 GE 12.89 1.58 12.16 28.15 12.89 6.58 24.91 48.14 9.81 11.31
1H07 GE 2.88 (3.34) 8.41 (1.31) 2.88 17.23 9.46 43.85 13.51 6.22
2H07 GE (3.16) (0.35) 17.32 20.80 (3.16) 12.30 11.70 62.31 32.29 (2.81)
1H08 GE (28.00) (15.53) (15.30) (22.72) (28.00) (19.43) (5.93) (15.47) (23.87) (12.47)
2H08 GE (39.30) (9.81) (12.91) (29.33) (39.30) (31.75) (9.42) (49.03) (41.56) (29.49)
1H09 MSFT 22.27 20.38 6.01 22.27 (27.65) 12.89 (12.43) 66.88 37.04 1.89
2H09 MSFT 28.23 7.03 18.77 28.23 29.10 23.26 (2.46) 47.96 47.06 21.20
1H10 MSFT (24.51) (17.13) (12.07) (24.51) (4.69) (4.66) (16.31) 19.36 (28.23) (7.38)
2H10 AAPL 28.24 6.41 31.23 21.30 26.84 8.12 28.12 28.24 33.49 21.83
1H11 AAPL 4.06 (0.89) 2.31 (6.84) 3.12 5.37 11.30 4.06 (14.75) 4.95
2H11 AAPL 20.65 25.55 3.98 (0.15) (5.04) 9.43 4.15 20.65 27.55 (4.90)
1H12 AAPL 44.20 35.75 11.75 17.84 16.36 9.90 0.96 44.20 (10.19) 8.45
2H12 XOM 1.15 (3.48) (7.28) (12.68) 0.72 (22.63) 1.15 (8.87) 21.95 4.63
1H13 XOM 4.39 (8.26) 10.65 29.34 10.48 17.51 4.39 (25.49) 24.46 12.65
2H13 AAPL 41.48 26.35 2.99 8.29 20.87 7.12 12.01 41.48 27.30 15.13
1H14 XOM (0.51) (6.48) 2.54 11.47 (6.24) 19.05 (0.51) 15.95 4.24 5.97
2H14 XOM (8.17) (13.19) (0.33) 11.39 (3.84) 17.44 (8.17) 18.78 (9.24) 5.02
1H15 XOM (10.01) (10.16) (7.08) (4.95) 5.14 16.19 (10.01) 13.63 1.77 0.15
2H15 GOOGL 44.07 45.03 9.51 25.66 17.24 13.27 (6.31) (16.08) 44.07 (0.96)
1H16 GOOGL (9.57) (12.32) 5.52 (7.77) 1.06 (4.79) 20.26 (9.18) (9.57) 2.75
2H16 GOOGL 12.64 5.93 (8.54) 21.44 0.38 10.58 (3.71) 21.15 12.64 6.71
1H17 GOOGL 17.32 9.14 8.18 10.93 (14.53) (6.98) (10.56) 24.35 17.32 8.17
Portfolio B 6-mth Return (%)
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Table 4-4: Holding stocks in Portfolio B by ranking upgrade/downgrade
This table reports the 7 names that have been selected into Portfolio B in different periods by ranking upgrades or downgrades. We find that only INTC is the one classified into “upgraded” stocks but delivers relatively negative excess returns, while the others all contribute to beautiful outperformances. The accumulated excess returns of the all “Downgraded” stock group are negative at -34% in total, which looks very bad comparing with that (+121.77%) of “Upgraded” group.