Value Strategy

Investing Strategies

Carefully adopting investing strategies can play a crucial role in helping achieve future financial goals. To actively select investing strategies within varieties, two main factors are taken into consideration: (1) achieving the lowest risk of portfolio with target of β=0; (2) generating neutral returns during short period and pursuing high profits in the long term. By considering these two factors, three investing strategies are chosen: Value strategy, Momentum strategy and long-short strategy.

Value strategy

value strategy states that shares perceived to be relatively undervalued by the market are purchased in order to realize superior long-term returns. (E Fraser and M Page, 2015)

John Ingemann demonstrates that it is possible to generate a consistent risk-adjusted excess return by investing in stocks that are undervalued in terms of various key ratios (John Ingemann Christensen,2015) such as stocks with high ratios of book value to the market value of equity have relatively high average returns (Fama and French, 2006).

In reality, LSV Asset Management specializes in using value equity strategy which mainly adopts a quantitative investment model to choose undervalued stocks. It currently manages approximately $118 billion in value equity portfolios for nearly 350 clients. Portfolio turnover with this strategy is around 30% and one-year return is around 18.32% which is quite higher than return on The Russell 1000 Value Index(13.66%). (LSV Asset Management, 2017)

Therefore, our group will adopt value strategy as a major stock-picking strategy to select stocks with high BV/MV ratios.

Momentum strategy

Momentum strategies are based on the premise that past performance can be used to earn superior returns in the short-term. (E Fraser and M Page, 2015)

There is certain finance literature which documents that the cross section of stock returns is predictable based on past returns due to prices adjusting too slowly to the updates. (Hong et al. 2000). Jegadeesh and Titman (1993) add a new twist to this literature by stating that over a horizon of three to twelve months, past winners are likely to continue to outperform past losers, so that there is "momentum effect" in stock prices. Momentum strategies that exploit such momentum, by buying past winners and selling past losers, which can generate positive abnormal returns (average return of 1% per month) over six month holding period. (Jegadeesh and Titman, 1993)