August, 2019 / Issue 1 - Editorial on nontraditional data for Israeli Investors
Deriving Quality and Growth Factors
Several factors can be derived from employment counts, benefits offered to the employees and pension contributions in order to rank, filter or over/underweight stocks in a given portfolio
Benefits Factor - A diversifying Quality factor and a good corporate governance example The intuition: companies providing more benefits to their employees than the sector peers are "quality names" and present an example of good corporate governance, which can contribute to a better stock performance Benefits can include
health, dental and vision plans,
life insurance
disability plans
and whether the pension plan is a defined contribution or benefit plan
Benefits factor tested: the number of benefits a company provides to its employees divided by the sector average count (including private companies)
Ranking public companies in the Russell 3000 Index and grouping them into quintiles, i.e. 20%-quantiles
Performance:
Companies with more benefits outperform
~3% annual return spread between the top and the bottom 20% by benefits. Sharpe ratio of 0.72 for the respective L/S strategy
Low or negative correlation to the traditional quality factors ROE, D/E and Earnings Variability: 0.11, -0.39 and -0.15, respectively
Growth Factor - derived from employment and pension contributions (IRS filings)
The intuition: capturing growth of a company by a weighted average of growth rates in pension plan contributions and statistics Growth rates for
contributions to pension plans by employees/company/total (yearly and only last year, overall and per employee eligible for a pension plan)
employee count (yearly and only last year)
Growth factor tested: weighted average of the above metrics on a company level.
Ranking public companies in the Russell 3000 Index and grouping them into quintiles, i.e. 20%-quantiles
Performance:
Companies with higher growth factor outperform
~3.8% annual return spread between the top and the bottom 20% by growth factor. Sharpe ratio of 1.05 for the respective L/S strategy
Sector-neutralization (especially GICS) can significantly improve the factor performance -> L/S return of ~6% per annum -> Low or negative correlation to the traditional EPS-based growth factors YoY EPS growth, 5Y EPS growth, FY2/FY1 EPS growth: -0.11, 0.12 and -0.36, respectively
Remark: all performance results are in-sample Source: Deutsche Bank