One of the key differentiators in the N+1 Singer research product is our extensive use of quantitative analytical techniques – aka “quant”. This a rarity in UK mid and small cap which we try to explain both the meaning of and the value of in this blog by looking at our latest Quality screen refresh.
Most research is “bottom up” consisting of notes and comments on individual companies and concluding with a directional recommendation like Buy or Sell the shares. This research can be immensely in-depth and give the investor tremendous insight into the investment case. In May for example we initiated with extensive notes on the following companies: Elektron Technologies, Fulcrum Utility Services, Miton Group and Urban&Civic. Sometimes bottom up research can be just a short one-pager news update or a brief reminder of our stance on a company on well-flagged figures – though we always strive to be pithy and relevant – with the median note being 3 – 4 pages long.
Research can also be “top down” – typically commentary on the economic or geopolitical backdrop or thematic investment ideas covering whole sectors of the market. A good example of this would be our two “Synchronicity” pieces this year published under our Strategy “Trend spotting” banner. A blog on the first can be found lower down this page under March and it talked about two key macro factors to take into account when investing in Industrial stocks. The second in April called “Synchonicity II” explored the idea of a better H2 for the hard hit consumer stocks (and interestingly they have bounced sharply since).
“Quant” though is tantalisingly different and sits somewhere between top down and bottom up. It is data driven and tries to rank stocks for selection on various criteria which are theoretically divorced from sentiment and subjectivity using statistical/mathematical techniques. A very simple screen might be to put a universe of stocks in yield order or PER order from which one might conclude that this stock or that stock is the better investment bet – though no recommendation is necessarily applied in the bottom up sense. More often our quant work is rather more complex and tries to uses several sorting factors to arrive at an interesting list of stocks from the whole of the mid and small cap universe. For example when screening for high quality companies one might set thresholds to include EBIT margins above X%, ROE above Y%, Cash Flow above Z% of EBIT, all combined with Net Debt to be no greater than XYZ%. One of the major challenges in mid and small cap is the quality and availability of consensus data and thus the selection of relevant data to express the targeted criteria is key.
Another is to conjure up relevant “styles” or investment themes for investors to look at – we at N+1 Singer have focussed in on screening for “Quality”, “Growth”, “Momentum” and “Value” over the last two years.
We typically draw up a list of the 25 stocks which exhibit the most extreme of the above style characteristics and then comment on c10 of those which we call our Focus list. We then monitor graphically the performance of these stocks over time relative to the Small Cap Index and the Microcap Index from which we can draw conclusions about how such stocks perform in different market conditions. For example the graph below (Figure 1) shows how our Quality screen has performed extremely well against the small cap stock average price over time, but that there are episodes of volatility during which the screen has underperformed for relatively short periods.
Click here to see Figure 1.
Here is a summary of why we think this is a value-added service to our institutional clients:
- It is a rare offering in mid and small cap and that factor alone gives our clients something different and valuable to inform their investment processes
- It enables us to look wider than our existing coverage and efficiently cover the whole of mid and small cap with reference to consensus numbers
- It can throw up new stock ideas for coverage and commentary challenging us and our clients to reassess current favourites. What might we be missing?
- By tracking the historic performance of each style in varying market conditions we can draw valuable conclusions about what investors are looking for and also comment on which styles work best at what times
In Figure 2 (see below), you can access a little more detail on our last Quality screen which ran from 24 October 2017 to 22 May 2018 before our refresh last month. The table shows the stocks we had screened at October (NB not the current selection) and the column on the right shows the individual share price moves and the significant outperformance this represented against the Smallcap and Microcap indices. Call our Quant guru Trevor Griffiths on 020 7496 3072 or email me to find out more about our current Quality screen and its constituents!
Click here to see Figure 2.
Head of Research