Equity markets got off to a rough start in 2022 and despite a few intermittent rallies, ended solidly negative and near the lowest levels for the year. The ability of selection models to sort the best and worst performers was particularly useful in a market-neutral strategy. While it was a difficult year for long-only equity investors to make gains, using well-defined models in equity selection helped produce better-than-average returns.
- Applying StarMine’s models in a market-neutral strategy produced net gains despite the decline in equity markets.
- StarMine’s models added value over comparable benchmark models, producing better results in nine of eleven models.
- Systematic use of factor models in stock selection can help long-only investors outperform in declining markets.
For more data-driven insights in your Inbox, subscribe to the Refinitiv Perspectives weekly newsletter.
Market-neutral model performance
StarMine Models
The chart above shows the top-bottom decile spread of each StarMine model compared with the spread of a comparable benchmark model.
- Factor models were highly effective, as ten of the eleven StarMine models produced positive top-bottom decile spreads for the year.
- StarMine models demonstrated added value as nine of them outpaced the top-bottom decile spread of their comparable benchmark.
Find out more about how our StarMine Models can enhance your research capabilities
StarMine Models
The graph above shows the top decile excess return of each StarMine model compared with the equal-weighted return of all stocks.
- While an equally weighted average of U.S. stocks declined 23.9 percent for the year, the top decile of most StarMine models performed well in comparison. Except for Insider Filings, all StarMine models produced top decile returns that beat the overall market average.
- The best performance was in Value Momentum. It was helped by the solid performance of its input models that include Intrinsic Valuation, Relative Valuation, Analyst Revision Model, and Price Momentum.
- Combined Alpha, Smart Holdings, Relative Valuation, and Intrinsic Valuation also had relatively strong top decile results.
StarMine Models
The above graph of the cumulative average returns for the top decile of each of the StarMine models shows how the year played out.
- Value Momentum was about flat in January and was able to maintain a lead in cumulative top decile return over the equal-weighted average universe and all other StarMine models for the entire year, finishing with a slight gain.
- As the equal-weighted average returns were negative for the first two months of the year, Price Momentum bucked the trend by advancing in February.
- May was a particularly good month for StarMine models. While the equal-weighted average for the universe of stocks declined, eight of the eleven StarMine models had positive top decile returns and ten of them outperformed the equal-weighted average of all stocks.
- June was a difficult month for StarMine models as top deciles underperformed the equal-weighted average in nine cases. With a rebound in July, model results were able to mostly beat the universe average.
- Top decile returns for eight of the models declined less than the overall market in September and the same number had higher increases than the market as it rebounded again in October.
- December was another down month for the market, but ten of the eleven StarMine models had lesser declines.
StarMine models prove useful in a down market year
Despite the difficult equity market conditions in 2022, the StarMine models were effective in helping investors outperform.
Value Momentum was able to deliver a positive top decile return and nearly every other StarMine model had top decile excess returns.
Employing the StarMine models in a market-neutral strategy would have netted positive gains in most cases and proved better than the application of benchmark measures in all but a couple of cases.
The universe presented includes the top 3,000 stocks in the United States and excludes micro-cap stocks. Performance reflects monthly rebalancing and excludes transaction costs.
Find out more about how our StarMine Models can enhance your research capabilities
