Endnotes and references

Model performance data is not a reliable indicator of future returns

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.

The Regional MATRIX grades

The Regional Matrix grades range from -100% to +100%: We consider a grade above 50% to be very bullish, a grade above 25% to be bullish, and a grade between 0% and 25% to be neutral. A grade between 0% and -45% we consider bearish and a grade below -45% very bearish.

Regional Grade: The Regional Grade (-100 to +100) is an indicator of a structural bull market or not. It is calculated by combining and applying weight to each of the other grades that make up the Regional Matrix (Trend, Overbought/Oversold, Valuation, Liquidity, Economics, and Sentiment). If we believe equities to be in a structural bull market, we use 15 years of data to assess Valuation.

Trend Grade: The Trend Grade (-100% to +100%) is based on a moving averages model adjusted according to the overbought/oversold conditions of the region’s main indices.

Valuation Grade: The Valuation Grade (-100% to 100%) is based on the percentile rank of the regional Index stocks’ P/E ratios since 1995 (current year estimated).

Economics Grade: The Economics Grade (-100% to 100%) is based on a combination of manufacturing and non-manufacturing PMIs and the Citigroup Surprise Indices. The Citigroup Economic Surprise Indices are an objective and quantitative measure of economic news and are defined as weighted historical standard deviations of data surprises (actual releases vs. Bloomberg survey median).  A positive reading of the Economic Surprise Index suggests that economic releases have on balance beaten the consensus.

Sentiment Grade: The Sentiment Grade (-100% to 100%) is based on various contrarian and non-contrarian indicators.Reversal date in the Trend: If the trend has reversed, we give the reversal date and indicate the direction of the reversal.

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 ex-pressed by way of regional scores (US; Europe; Japan and EM); in each case an average of underlying factors scores with dynamic weighting applied according to the prevailing longer-term structural market regime. Score ratings are: very bullish (80-100%); bullish (60-80%); neutral (40-60%); bearish (20-40%); and very bearish (20-0%).

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 or equivalent), 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 

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 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. 

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