By Tabinda Hussain. Originally published at ValueWalk.
Société Générale publishes a monthly update on the performance of several value orientated fundamental trading strategies across both developed and emerging markets. For deep value investors, one of the most interesting screens is the Graham & Rea deep value screen. These are the results of the screen for the month of July, as published on July 3 2015. A list of the stocks that qualified for the screen last month can be found here.
Two categories
Société Générale splits these criteria into two categories. The first five criteria are deemed to be very sensitive to price and earnings changes while the second five are not. In other words, the first five criteria are there to measure the potential reward from investment while the second five seek to minimize risk. These criteria are extremely strict, as Graham intended, and Société Générale’s analysts’ note that during the past 18 years, only 21 stocks have satisfied all five criteria in the first category, while only 5% of the universe passed the second set of five.
Only three companies over 18 years passed all ten criteria. Companies that pass at least seven criteria are the main source of substantial excess returns (26% on average). However, these stocks only represent less than 0.5% of the overall portfolio. Reducing the number of criteria required to pass the screen increases the number of qualifying companies, but as you would expect, leads to a substantial drop in excess returns.
Deep value in developed markets
For developed market equities, Société Générale’s deep value screen covers the universe of FTSE World Developed and FTSE 350 stocks. The screen shows companies that score 2.5 or better on Graham & Rea value and risk criteria. Financial stocks are excluded.
And the screen’s returns are highly impressive. From inception during 2002 to date, the stocks qualifying for the screen have returned 16.6% per annum, outperforming the wider universe of FTSE World Developed and FTSE 350 stocks by 5.9%. Returns are calculated on a total return $US basis and the portfolio is rebalanced monthly.
Graham & Rea deep value screen returns
Here’s the list of developed market stocks that currently meet the Graham & Rea screening criteria. If you’re interested in the stocks that qualified for the screen last month, the list was published here.
Graham & Rea deep value screen results
Deep value in emerging markets
Société Générale also applies the Graham & Rea screen to FTSE World Emerging stocks. Once again, all financial companies are excluded. The portfolio is subject to a monthly rebalancing and companies have to score 2.5 or more on the Graham & Rea screen to qualify.
Here are the returns of the screen since inception compared to the FTSE World Emerging stock universe.
Here are the top ten emerging market stocks that qualified for the Graham & Rea screen at the beginning of July.
Once again, if you’re interested in the stocks that qualified for the screen last month, the list can be found here.
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