Sunday 17 August 2014

The Bounceback Portfolio of STI

One of the good things about blogging is that you get to learn from your readers as well. A reader introduced me to the Bounceback Portfolio and requested me to carry out a review of it in Singapore's context. The idea of the Bounceback Portfolio is that a portfolio of the 10 worst performing FTSE350 stocks in one year has historically beaten the index in the first three months of the following year. 

However, when I apply the idea in Singapore's context, I faced 2 issues immediately. Firstly, the corresponding index to FTSE350 is actually the FTSE ST All-share Index. Unfortunately, I am unable to find the component stocks of this index. The next best comparison is the Straits Times Index (STI). However, it has only 30 stocks. Selecting 10 out of 30 stocks might not reflect correctly the concept of the Bounceback Portfolio. On the other hand, if going by proportion, the Bounceback Portfolio should only contain 1 stock, which again is not reflective of the concept. A compromise is taken to select only 5 stocks from the STI. The results are shown below.

Performance of Bounceback Portfolio in the 1st Quarter of the Following Year

Highlighted are the 5 worst performing stocks in the STI in the preceding year. The results shown above are their returns in the first quarter of the following year. Based on the above results, the Bounceback Portfolio returned an average of 6.3% in the first quarter, beating the returns of 0.8% for STI, 2.9% for an equal-weighted STI and 3.7% for STI without the heavy weights (i.e. DBS, OCBC, Singtel and UOB). Thus, on the surface of this information, the Bounceback Portfolio beats the STI and a number of STI-based portfolios. However, do note that the above analysis is conducted on a modified version of the Bounceback Portfolio, i.e. 5 out of 30 STI stocks versus 10 out of 350 FTSE350 stocks in the original Bounceback Portfolio. Hence, the results may not reflect the actual performance of the original Bounceback Portfolio in Singapore's context.

Comparison with Dogs of Dow

Nevertheless, on a conceptual basis, we could compare the Bounceback Portfolio with the more well-known Dogs of Dow investment strategy. The comparison is shown below.


Dogs of Dow
Bounceback Portfolio
Stock Selection Criteria
10 highest yielding DJIA component stocks (out of 30)
10 worst performing FTSE350 component stocks (out of 350)
Holding Period
1 Year (Jan to Dec)
3 Months (Jan to Mar)
Theoretical Basis
A stock that is higher yield than average would most likely be near the bottom of the business cycle and the stock price is likely to recover more than that of lower-yielding stocks
A portfolio of the 10 worst performing FTSE350 stocks in one year has historically beaten the index in the first three months of the following year
Average Holding Period Returns
10.8% (1 year)
5.8% (3 months)
Same-Period Benchmark Returns
10.8% (DJIA)
9.6%   (S&P500)
3.8% (FTSE350)
Benchmark Comparison Period
20 years (ending Dec 2011)
2 years (ending Mar 2014)

On the theoretical basis, the Dogs of Dow is based on assumptions about the company's economical performance whereas the Bounceback Portfolio is based on assumptions about the company's stock market performance. It should be noted that the Bounceback Portfolio is held for the first quarter of the following year only. This period includes January, which is traditionally the best month for stocks.

On portfolio performance, the Dogs of Dow performed better than the Bounceback Portfolio. On the other hand, the Bounceback Portfolio beat its benchmark index by a larger margin compared to the Dogs of Dow. However, the Bounceback Portfolio is a much newer concept with only 2 years of history. Thus, this comparison is not a fair one and more history is needed on the Bounceback Portfolio for a fairer comparison.

Conclusion

The Bounceback Portfolio is a very new concept with only 2 years of history. More data is needed to evaluate the Bounceback Portfolio better. However, it may not be suited for implementation in Singapore due to the small no. of component stocks in the STI.


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