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Long/Short Sector-based Trading Strategy Emergent Asset Management, LLC

Long/Short Sector-based Trading Strategy Emergent Asset Management, LLC. Konstantin Savov Scott Smith Pin-Yew Wong Vaswar Mitra Vinaya Jain. February 27, 2006. Agenda. Establishing the Long/Short Trading Strategy Description of Factors Scoring Methodology Sectors Chosen for Analysis

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Long/Short Sector-based Trading Strategy Emergent Asset Management, LLC

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  1. Long/Short Sector-based Trading StrategyEmergent Asset Management, LLC Konstantin Savov Scott Smith Pin-Yew Wong Vaswar Mitra Vinaya Jain February 27, 2006

  2. Agenda • Establishing the Long/Short Trading Strategy • Description of Factors • Scoring Methodology • Sectors Chosen for Analysis • Sector Analysis • Average Top and Bottom Quintile Returns for all Considered Factors • Factors Chosen and Calculated Scores • In Sample Analysis 1996-2003 • Out of Sample Analysis 2004-2005 • Imperfections in the Analysis

  3. Establishing Long/Short Trading Strategy • Overview • Limit universe of stocks to firms with market capitalization > $500M • Stocks selected from the S&P 1500 Index (US large, mid and small cap stocks). • Sectors were defined using S&P’s GICS classification system • We feel these stocks will have sufficient liquidity and historical data • Establish long / short sector based portfolios using quantitative stock selection. • Equal weight strategy • Rebalance portfolios monthly • In Sample: 1996-2003, Out of Sample: 2004-2005 • Quantitative stock screen • Thirteen factors considered initially • Find predictive powers on positive and negative returns • Select factors with strong predictive power for sector returns • Go long stocks in top quintile • Go short stocks in bottom quintile

  4. Description of factors Fundamental • Book to Price: book value per share / price per share • Dividend Yield: dividends per share / price per share • CFO Yield: cash flow from operations / price per share • Earnings Yield: LTM earnings / price per share • Return on Assets: annual net earnings / total assets • % Change in ROA: % change in ROA over previous month • Return on Equity: annual net earnings / total shareholder equity • % Change in ROE: % change in ROE over previous month Expectational • Revision Ratio: (Upward revisions – downward revisions) / total revisions • SUE Score: standard unexpected earnings (Earnings surprise / std deviation) • Mean FY1 to Actual % Change: (FY1 Estimate – Current Actual) Current Actual • LT Projected Growth – Historical Growth: Next 5 year annualized estimate – previous 5 year annualized actual Momentum • 12-Month Lagged Monthly Price Growth: Eg: (Jan’06 Price – Jan’05 Price) / Jan’05 P

  5. Scoring methodology We tried using an objective scoring methodology • Each month the quintiles are ranked based on returns • Assign points from highest to lowest rank (+2,+1,0, -1, -2) • Sum points for quintiles 1 and 5 • Scale points across factors from +10 to -10

  6. Sector choice Considerations in choosing sectors: • Sufficient number of companies in the defined universe • Maturity of sector Final Choice • Financials • Industrials • Healthcare

  7. Financials

  8. Average Annual Factor Returns for top and bottom quintiles Financials

  9. Factors chosen & calculated scores Financials

  10. In sample analysis 1996-2003 Financials

  11. Out of sample analysis 2004-2005 Financials

  12. Healthcare

  13. Average Annual Factor Returns for top and bottom quintiles Healthcare

  14. Factors chosen & calculated scores Healthcare

  15. In sample analysis 1996-2003 Healthcare

  16. Out of sample analysis 2004-2005 Healthcare

  17. Industrials

  18. Average Annual Factor Returns for top and bottom quintiles Industrials

  19. Factors chosen & calculated scores Industrials

  20. In sample analysis 1996-2003 Industrials

  21. Out of sample analysis 2004-2005 Industrials

  22. Imperfections in analysis • Monthly rebalancing – trading costs not taken into consideration • Migration tracking could potentially reduce turnover and trading costs • Need a more exact estimation of the impact of turnover and short sale restrictions • Use of static scores

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