Do Signals From Earnings Revisions Matter for Size- or Sector-Neutral Fundamental Factor Strategies?

In our earlier blog, “How Important Are Earnings Revisions Signals for Fundamental Factor Strategies in Asia?”, we discussed that the signals from earnings revisions were important for fundamental factor strategies applied across broad markets. They reduced the risk and enhanced the return of the comparable factor portfolios, across the majority of markets. In our research paper, “Earnings Revision Overlay on Fundamental Factors in Asia”, we also studied whether the earnings revision signals remained effective on size- or sector-neutral fundamental factor strategies.

The sector-neutral earnings revision overlay on fundamental factors was done in three steps. First, we selected the top quartile of stocks by each fundamental factor from each sector. Next, we dropped the bottom quintile of stocks by earnings revision from the stocks selected in the first step from each sector. Lastly, stocks selected from each sector were aggregated to form the final portfolios.

The large-mid-cap earnings revision overlay on fundamental factors was done in two steps. First, we selected the top quartile of stocks by each fundamental factor from the large-mid-cap universe. Next, we dropped the bottom quintile of stocks by earnings revision from the stocks selected in the first step.

The small-cap earnings revision overlay on fundamental factors was done similar to the large-mid-cap strategy, except that the stocks belonged to the small-cap universe.

The results showed that historically, the sector-neutral, large-mid-cap, and small-cap earnings revision-screened factor portfolios outperformed their respective sector-neutral, large-mid-cap, and small-cap comparable factor portfolios in the majority of markets. They were most effective in the Australian market (see Exhibit 1).[1]

The signals from earnings revisions had better synergy with quality factors than value factors across the majority of markets for sector-neutral, large-mid-cap, and small-cap portfolio strategies.

[1]   For other markets, please see the “Earnings Revision Overlay on Fundamental Factors in Asia”.

The posts on this blog are opinions, not advice. Please read our disclaimers.

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