Comparing Stock Sorting Methodologies

Strategic Partners

27 Feb 04

Current Sorting Methodologies

Independent Sparse buckets

Layered Equal # of stocks/bucket

Bi-variate Simultaneous Sorting

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FA

CT

OR

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15

234

1

FACTOR 2

Independent Sort Sequential Sort

Score i = (wt1)*(Factor1_Rankingi)

+ (wt2)*(Factor2_Rankingi)

Score i = (wt1)*(Factor1_Rankingi)

+ (wt2)*{Factor2_Rankingi | Factor1_Rankingi}

Factor 2

Fac

tor

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1 2 3

23 1

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Independent Sort Sequential Sort

Correlation (Factor1_Ranking, Factor2_Ranking) = 0

Fac

tor

1

Factor 2

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Factor 2

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tor

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1 2 3

23 1Independent Sort Sequential Sort

Correlation (Factor1_Ranking, Factor2_Ranking) = 1

Factor 2

Fac

tor

1

1

2

3

1 2 3

23 1Independent Sort Sequential Sort

Correlation (Factor1_Ranking, Factor2_Ranking) = -1

Factor 2

Fac

tor

1

1

2

3

1 2 3

Data

Universe Large Cap (>500 Million) Listed on NYSE or NASDAQ

Variables Fundamental Technical Debt Structure

Correlation Impact

Comparing Methodologies

Different Factors Weighting

Equal Weight vs. Value Weight Time Horizon

Value vs. Growth Market

Factor Selection

Factor Comparison

-1.5

-1

-0.5

0

0.5

1

1.5

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2.5

3

-1- -2- -3- -4- -5-

Portfolio

Retu

rn(%

)

PE D_E DownRev ROA UpRev

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FACTOR 1

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FACTOR 2

Importance of Sequence

Impact of Sort Order

Sort Order Comparison

-0.5

0

0.5

1

1.5

2

2.5

PE_Lev Lev_PE

Sort Order

Ret

urn

Dif

fere

nce

(5-

1)(%

)

EW VW

-1- -2- -3- -4- -5- -1- -2- -3- -4- -5-

Cumulative annual returns - (index = 100 each year)

2001 98.2 99.5 100.3 100.9 101.1 96.2 98.8 99.1 100.0 100.0

2002 97.8 98.5 99.3 99.6 100.6 97.4 98.2 98.8 98.9 100.3

2003 104.1 103.0 103.2 103.3 104.6 104.2 101.8 102.8 102.7 103.5

2001 1.0 2.0 3.0 4.0 5.0 1.0 2.0 3.0 4.0 5.0

2002 1.0 2.0 3.0 4.0 5.0 1.0 2.0 3.0 4.0 5.0

2003 4.0 1.0 2.0 3.0 5.0 5.0 1.0 3.0 2.0 4.0

Average relative performance 2.0 1.7 2.7 3.7 5.0 2.3 1.7 3.0 3.3 4.7

Portfolios - equal weighted Portfolios - value weighted

Screening Results PE/Leverage Layered Sort

-1- -2- -3- -4- -5- -1- -2- -3- -4- -5-

Cumulative annual returns - (index = 100 each year)

2001 99.2 99.2 99.4 99.8 99.7 98.5 98.9 98.0 98.2 98.0

2002 98.2 98.4 98.5 99.2 99.0 98.5 98.0 98.5 98.0 98.3

2003 104.4 103.7 103.9 103.6 104.0 103.7 102.8 102.7 102.6 103.5

2001 2.0 1.0 3.0 5.0 4.0 4.0 5.0 2.0 3.0 1.0

2002 1.0 2.0 3.0 5.0 4.0 4.0 2.0 5.0 1.0 3.0

2003 5.0 2.0 3.0 1.0 4.0 5.0 3.0 2.0 1.0 4.0

Average relative performance 2.7 1.7 3.0 3.7 4.0 4.3 3.3 3.0 1.7 2.7

Portfolios - equal weighted Portfolios - value weighted

Screening Results Leverage/PE Layered Sort

Future Research

Use longer time horizon to incorporate different markets

Compare Bi-variate to Layered and Independent Screening

Use Deciles rather than Quintiles Migration tracking

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T-1

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T-2

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T-3

Stock Sorting with Migration Tracking

adjusted Score = Score + Migration adjustment