Endnotes and references

Model performance data is not a reliable indicator of future returns

Model performance calculation has a number of limitations and the results do not represent the results of actual trading using client assets. The data provided is gross of fees and other commissions.  Fees and charges will apply and will reduce the final return.  No representation is being made that any models or model portfolios illustrated will or are likely to achieve results similar to those shown and there are often sharp differences between model performance results and actual results achieved.

The Equity quantitative grades

Our equity quant process is one by which we rank and score the stocks within our equity universe according to various short-term (i.e. EPS growth) long-term (i.e. quality) and positioning (i.e. technical) characteristics, and on relative and/or historical basis as appropriate. The various scores make up a stock’s total or ‘global' grade’:Growth Grade: The Growth Grade is a proprietary formula made up of earnings revision momentum, past earnings growth, earnings stability, and current and long-term earnings growth.  A grade above 55 is considered bullish on a 3-month basis, bearish below 45 and neutral between 55 and 45.

EPS Grade: The EPS Grade is a proprietary formula consisting of current and forward EPS growth, change and surprise data.  An EPS grade above 60 or below 40 is considered predictive for future out/under performance.Sales Grade: The Sales Grade is a proprietary formula made up of current and next year’s sales momentum, past sales growth, sales stability, and current and long-term sales growth. A grade above 55 is considered bullish on a 3-month basis, bearish below 45, and neutral between 55 and 45.

Value Grade: The Value Grade is a proprietary formula made up of estimated P/E, P/B, P/S and P/CF ratios. 40% of the grade is based on historical values and 60% on current market data.  A grade above 55 suggests a stock is cheap, below 45 expensive, and neutral between 55 and 45.

Quality Grade: The Quality Grade is a proprietary formula that focuses on the balance sheet (i.e. change in accruals, change in free cash flows and profitability). A grade above 55 suggests a healthy balance sheet.Credit Grade: The Credit Grade focusses on the passive side of the balance sheet.  It is divided into three sub-components to assess both short and long-term solvency.  A grade above 55 suggests a strong capital structure, while a grade below 45 suggests a weak one.

Money Flow Grade: The Money Flow Grade is a proprietary formula that gives the accumulation/distribution based on the volume flows of a stock. A grade above 55 indicates good money flow and a grade below 45 suggests weak money flow.Smart Sentiment Grade: The Smart Sentiment grade is a contrarian indicator based on investor positioning measures such as the days-to-cover ratio, the put-call ratio, and the short-interest ratio.  A weak grade suggests ‘too much’ optimism.

Relative Strength (RS) Grade: The RS grade measures the price momentum of a stock over its 1-year price performance.

Global Grade: The Global Grade is a weighted average of the Growth, EPS Sales, Value, Quality, Credit, Money Flow and Smart Sentiment Grades.

Trend Score

A normalized composite of 10 underlying indicators that look at price relative to key moving averages, moving average trajectories and crosses, and overbought/sold condition. Absolute and Relative scores range from -10 (worst) to +10 (best).

The Exposure Optimisation Model

The PTS Exposure Optimisation Model (EOM) is a proprietary model designed to give tactical signals on the prevailing short-term regional equity market regime. The model is applied to each market on a mutually-exclusive basis, with output expressed by way of exposure scores (US; Europe; Japan and EM); in each case an average of underlying factors scores with dynamic weighting applied according to the prevailing structural market volatility regime. Exposure score ratings are: very bullish (80-100%); bullish (60-80%); neutral (40-60%); bearish (20-40%); and very bearish (20-0%). Factors are as follows:

Regime: A combination of technical indicators, moving averages and a Constant Proportion Portfolio Insurance (CPPI) strategy, the regime score is designed to reflect short-term market momentum in the region;

Valuation: Built around the forward price-to-sales ratio, the dynamic valuation score is based on a calculation that is re-set on bull/bear market regime changes and calibrated to facilitate regional comparison;

Economics: The economics score draws on real economy activity data (i.e. heavy truck sales and shipping traffic), economic signals from financial markets (i.e. yield-curves) and medium-term economic indicators (i.e. PMIs and unemployment data); 

Flows: The flows score draws upon both active and passive weekly EPFR fund flows data giving us an indication of risk appetite going into the week ahead; 

Market Sentiment: The market sentiment score is built around classic regional market risk indices (i.e. VIX; ARMS) as well as soft survey data (i.e. U.of Michigan Consumer Sentiment). The scoring system is applied in a similar fashion at both regional and market level, while at sector level we refer only to the Regime, Flows and Valuation factors.

Factor trends 

When analysing factor performance in equity markets we look at the performance of 5 theoretical long-short selections, each built around one of our equity quantitative grades (i.e. growth (EPS momentum), price momentum (RS), quality, sentiment and value), and each long the top decile and short the bottom decile of stocks within the respective region in our equity universe in terms of exposure to each specific score. 

Long-only selection lists

Our theoretical long-only selection lists (Europe and US) are made up of stocks selected following a three-pronged approach (quantitative, qualitative and technical), with reference to the in-house top-down and bottom-up quantitative modelling and processes explained above, and with market timing and objectives (theoretical targets and stop-losses) set with reference to technical analysis.

Technical Analysis

The technical analysis used in this presentation combines traditional technical tools: graphical analysis (trend lines, support lines, continuation and reversal patterns) which determines the tendency, mathematical indicators (moving averages, RSI, MACD) used as numeric filters and Elliot wave theory which allows us to build a scenario with target levels and invalidation points. We also occasionally refer to Ichimoku Cloud Technical Analysis. 

Elliott Wave Theory: According to Elliott Wave Theory, markets move in impulse waves – with five sub-waves (numbered 1-5 or I-V) following the direction of the main trend, followed by three corrective sub-waves (A-B-C) (example below).  These waves follow a set of specific rules and are linked to each other by target and retracement ratios based on the Fibonacci sequence, and the characteristics of each wave form an integral part of the reflection of the mass psychology it embodies.

Relative Strength Index (RSI): A momentum oscillator that measures the speed and change of price movements. It ranges from 0 to 100 and is typically used to identify overbought or oversold conditions in a market. An RSI above 70 suggests that a stock may be overbought, while an RSI below 30 indicates that it may be oversold.

The Moving Average Convergence Divergence (MACD): A trend-following momentum indicator that shows the relationship between two moving averages. It is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12- period EMA. The result is the MACD line. A nine-day EMA of the MACD, called the signal line, is then plotted on top of the MACD line, which can function as a trigger for buy or sell signals. When the MACD crosses above the signal line, it is typically considered a bullish signal, and when it crosses below, it is considered bearish.

Ichimoku Cloud Technical Analysis: Ichimoku Cloud is a popular technical analysis tool used to identify potential trends and support/resistance levels in financial markets. It consists of several components, including the Kumo (cloud), the Tenkan-sen (conversion line), the Kijun-sen (base line), and Senkou Span (leading span). 

Time Horizon

Short-Term: 1 to 4 weeks

Medium Term: 1 to 3 months

Long Term: more than 3 months