Performance of
Investing Strategies
in the Hong Kong
Stock Market
September 18, 2012
Sponsored by:
Value Partners Center for
Investing
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 returns tested in this study provided investors with good future returns. 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 returns and past six-month cumulative returns (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 returns and past six-month returns (momentum). We calculate both equal- and value-weighted forward-looking one-month returns of a portfolio. The equal-weighted returns of a portfolio is the simple average of all stocks’ returns in the portfolio whereas we calculate the value-weighted returns of a portfolio by weighting each stock’s returns 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 returns of each portfolio from the HSI returns. The difference in returns 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
idiosyncratic volatility. We therefore report the performance of portfolios sorted by market capitalization, total volatility, one-month returns and momentum (six-month returns) in Table 1. We find that the equal-weighted portfolios with high past one- and six-month returns outperformed stocks with low one- and six-month returns. These two strategies generated higher returns than the HSI although not in a significant way. The portfolio with the highest one-month returns also generated market-adjusted excess returns (alpha) in CAPM, but not the portfolio with the highest six-month returns. The zero-cost portfolios that long the portfolios with the highest one- and six-month returns and short the portfolios with the lowest one- and six-month returns generated returns of 1.42%-1.52% and market-adjusted excess returns (alpha) of 1.74%-1.80% in CAPM per month over the 1990-2011 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
Market Capitalization Total Volatility One-Month Returns Momentum Rank Returns Excess
returns Alpha Returns
Excess
returns Alpha Returns
Excess
returns Alpha Returns
Excess 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% -1.01% (2.02) (-0.57) (0.16) (0.63) (-2.98) (-3.77) (0.71) (-1.83) (-1.92) (0.40) (-2.31) (-2.29) 2 0.74% -0.56% -0.30% 1.04% -0.25% 0.03% 0.17% -1.13% -0.90% 0.16% -1.14% -0.89% (1.42) (-1.43) (-0.80) (2.44) (-0.89) (0.14) (0.33) (-3.17) (-2.69) (0.33) (-3.21) (-2.73) 3 0.67% -0.62% -0.38% 1.18% -0.12% -0.02% 0.55% -0.74% -0.46% 0.84% -0.45% -0.19% (1.37) (-1.83) (-1.22) (2.21) (-0.37) (-0.06) (1.26) (-2.48) (-1.79) (1.84) (-1.46) (-0.69) 4 0.82% -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 returns.
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
while the HSI only generated $14.5. The portfolios with the highest market capitalization, closing price, total volatility, idiosyncratic volatility, past one-month returns 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 returns 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 returns 29 times that of the HSI and outperformed the two strategies based on past returns by over eight times, while the investing strategy based on the book-to-market ratio outperformed these two strategies by 2.5 times.
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.
0 100 200 300 400 500 600 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 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 PA YO FF
Cumulative Payoff of Investing Strategies
BOOK TO MARKET EARNINGS TO PRICE DIVIDEND TO PRICE
PAST RETURN PAST SIZE PAST PRICE
MOMENTUM TOTAL VOLATILITY IDIOSYNCRATIC VOLATILITY HANGSENG
Conclusion
We find that the two investing strategies based on past returns tested in this study generated good returns 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 returns did over the past 22 years in the Hong Kong stock market.
About Value Partners Center for Investing (http://vpcenter.ust.hk/)
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 (http://www.valuepartners.com.hk/en/home.html)
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.
Author Contact Information
Dr. Samuel Xin Liang Associate Director
Value Partners Center for Investing Tel: +852 2358 8204
Mobile: +852 6880 3831 Fax: +852 2358 1749 Email: [email protected]
Supporting Researcher: Ms. Cheuk, Man Yin
