Stock Selection in Korea

Beyond Efficient Frontier Capital Management

Onthida Boonpiamsak

Pab Jotikasthira

Jeongsik Lee

Neal Triplett

Jaekeun Yoon

Agenda

• Sorting method and attributes for screening

• Diagnostics

• Factor/portfolio selection

• Optimization

• Conclusion

Sorting MethodAttributes for Screening

We used sorting method in stock selection:

Univariate Attributes

•Dividend yield

•Earning growth

•Projected Earnings Growth

•Projected P/E

•ROE

•Reinvestment Rate

•Momentum (1mo., 1yr.)

•Cash Flow to Price

•Earnings to Price

•Book to Price

•Revenue Growth

Bivariate Attributes

•BV/P and MCAP

•Dividend yield and Earning growth

•Dividend yield and Projected EY

Diagnostics

Performance Measurement• Average return and excess returns over market and risk-free

• % Periods > Market

• % Periods with positive return

• Average ranking score

Consistency Measurement• Standard deviations of returns and excess returns

• Year by year ranking score

Factor /Portfolio Selection

Significant Attributes• CF/P• E/P• PPE• ROE• RIR• BV/P and MCAP• DY and PPE

Korean Stock Market (6/93-5/98)Korean Stock Market

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Factor/Portfolio Selection

Diagnostic Top Middle Bottom

Average excess returnover market

12.7% -6.0% -13.2%

Standard deviation ofexcess return

14.31% 17.29% 17.91%

% Periods > Market 69.49% 35.59% 42.37%

Average ranking score 1.4 2.4 2.2

Cash Flow/Price

Factor/Portfolio Selection

Diagnostic Top Middle Bottom

Average excess returnover market

8.7% 1.0% -9.1%

Standard deviation ofexcess return

13.71% 16.15% 17.04%

% Periods > Market 61.02% 57.63% 40.68%

Average ranking score 1.2 2.2 2.6

Earning/Price

Factor/Portfolio Selection

Diagnostic Top Middle Bottom

Average excess returnover market

12.1% 4.3% -17.0%

Standard deviation ofexcess return

14.11% 16.84% 12.98%

% Periods > Market 62.71% 61.02% 40.68%

Average ranking score 1.4 2.0 2.6

Prospective Price/Earning

Factor/Portfolio Selection

Diagnostic Top Middle Bottom

Average excess returnover market

9.5% 2.8% -12.9%

Standard deviation ofexcess return

14.15% 16.15% 20.59%

% Periods > Market 67.80% 66.10% 39.98%

Average ranking score 1.4 1.6 3.0

Return On Equity

Factor/Portfolio Selection

Diagnostic Top Middle Bottom

Average excess returnover market

9.5% -0.6% -10.1%

Standard deviation ofexcess return

14.49% 16.56% 16.75%

% Periods > Market 66.10% 54.24% 49.15%

Average ranking score 1.2 2.0 2.8

RIR

Factor/Portfolio Selection

Diagnostic Top Middle Bottom

Average excess returnover market

5.9% -11.3% -20.2%

Standard deviation ofexcess return

20.34% 18.75% 24.3%

% Periods > Market 61.02% 40.68% 45.76%

Average ranking score 1.2 2.6 2.2

Low Book Value/price Sorted by MCAP

Factor/Portfolio Selection

Diagnostic Top Middle Bottom

Average excess returnover market

15.4% -10.3% -15.6%

Standard deviation ofexcess return

23.75% 20.58% 23.09%

% Periods > Market 55.93% 37.29% 42.37%

Average ranking score 1.4 2.4 2.2

Low Dividend Yield Sorted by Projected P/E

Optimization

Match market volatility and maximize return: Weight Weight

(Top) (Bottom)

BV/P and DY -0.20 0.32

CF/P 0.37 -0.20

E/P -0.02 0.00

PPE 0.43 0.07

ROE 0.38 0.11

RIR -0.20 -0.06

Optimization

In-sample performance:

• Beat market by 0.96% per month on average.

• Beat market 68.75% of the time.

Out-of-sample test on 11-month data:

• Beat market by 2.83% per month on average.

• Beat market 72.73% of the time.

Conclusion

• Significant attributes in selecting stocks include CF/P, E/P, PPE, ROE, RIR, and BV/P and dividend yield together.

• In Korea, stock selection (by sorting method) can help improve performance.

• One important finding is that top fractiles tend to have high correlations with one another; hence, we may need to use bottom fractiles to reduce volatility.