Edelweiss Style Analysis

Edelweiss Style Analysis
What‘s hot...
March 2009
Edelweiss Style Analysis
Yogesh Radke
+91 22 6620 3199
yogesh.radke@edelcap.com
Mehul Patel
+91 22 4063 5556
mehul.patel@edelcap.com
Edelweiss Securities Limited
1

Edelweiss Style Analysis
CONTENTS
What’s Hot ....................................................................................................................... 2
ESA (Edelweiss style analysis)
Introduction ...................................................................................................................... 3
Factor model
Style Analysis
Various factor
Why Multi Factor Model………………… ....................................................................................... 4
Edelweiss Style Analysis ..................................................................................................... 5
Various Factor Groups ........................................................................................................ 6
Momentum factor
Growth factor
Value factor
Quality factor
Conclusion .......................................................................................................................10
Market Snapshot ..............................................................................................................11
Edelweiss Multi Factor Models .............................................................................................12
Back-Test Results .............................................................................................................13
Edelweiss style analysis factor model
Appendix:........................................................................................................................16
Assumptions ....................................................................................................................18
Edelweiss Securities Limited
2

Edelweiss Style Analysis
What’s Hot
Edelweiss style analysis portfolio- ESA
Under prevailing market conditions, ESA factor model indicates EV to Fixed Assets, 6-month
price momentum and Cash flow growth are three Street favorite factors for stock picking for
March 2009.
We recommend equal weighted value neutral portfolio.
Current month portfolio
Portfolio for March 2009
Top 10 Long-portfolio stocks
Company Name
A C C
G A I L (India)
N T P C
India Cements
Tata Power Co.
Grasim Industries
Hero Honda Motors
Bharti Airtel
I T C
Bharat Petroleum Corpn.
Bottom 10 Short-portfolio stocks
Company Name
Mahindra & Mahindra
Tata Consultancy Services
Bharat Heavy Electricals
Tata Chemicals
Larsen & Toubro
Reliance Infrastructure
Divi'S Laboratories
Wipro
A B B
Suzlon Energy
Source: Edelweiss research
Performance for the last month: Long only = (0.6%), NIFTY = (1.4%), Short only= 8.0%,
Long-Short NIFTY = 0.8%, Long-Short stocks = 7.4%
Previous month ESA portfolio was based on 12-month price momentum, 6-month price
momentum and 3-month price momentum.
Previous month portfolio
Portfolio for February 2009
Top 10 Long-Portfolio stocks
Company Name
% Return
Hindustan Petroleum Corpn. (0.3)
Bharat Petroleum Corpn. (0.9)
N T P C (2.9)
Hero Honda Motors 4.8
Indian Oil Corpn. 0.8
Hindustan Unilever (1.3)
Power Grid Corpn. Of India 2.7
Cairn India 1.1
Tata Communications (11.1)
Cipla 0.8
Total average return (0.6)
Bottom 10 Short-Portfolio stocks
Company Name
% Return
Reliance Communications 1.8
Siemens (13.1)
Suzlon Energy 8.6
Bharat Forge (3.7)
J S W Steel 11.0
D L F 4.8
Punj Lloyd 11.6
Welspun-Gujarat Stahl Rohren 15.9
Housing Development & Infrastructure 19.2
Aban Offshore 23.4
Total average return 8.0
Source: Edelweiss research
Edelweiss Securities Limited
3

Edelweiss Style Analysis
Introduction
Factor model
Over the past few years, Indian capital markets have taken giant strides to enter the league
of global profitable investment avenues. This growth has attracted investors with diverse
investment strategies in quest for better returns. Along with this bustling growth, investment
strategies too are undergoing a paradigm shift. The conventional long only strategies are
gradually being sidelined by quantitative models with emphasis on long-short portfolios. Such
a drift is justified on the back of volatile nature of equity markets globally.
The Edelweiss Style Analysis (ESA) gives you cutting-edge research and an in-depth analysis
on ‘what’s hot’ in the current scenario. The analysis revolves round various factors driving the
market in different scenarios and tries to capture factors driving the current momentum. We
believe that markets follow a typical investment style or pattern at different intervals, which
is mirrored by certain factors. The analysis provides investors with an understanding of the
factors that are currently working in prevailing market conditions to enhance portfolio
performance. The analysis outlines a host of long–short portfolios drawn on the basis of these
factors.
The efficacy of the Factor Model is gauged by the performance of portfolios from various
dimensions:
• Long Portfolio
• Short Portfolio
• Long–Short Portfolio
• Long–Short Nifty
• Nifty
Style analysis
Style analysis is basically a framework for measuring the efficacy of a select set of
fundamental and technical factors blended with certain quantitative disciplines. It tries to
encapsulate traditional investment styles of value and growth buying. Style analysis aims to
capture the factor momentum under prevailing market conditions to maximize the magnitude
and stability of expected incremental performance. However, due to changing market
dynamics, factors are bound to change from time to time. A specific factor riding the
momentum may change over a period of time.
Various factors
Style analysis makes use of a host of factors that aid momentum in a specific stock. P/E, EPS,
revenue, book value, EBITDA, enterprise value, P/BV, RoE, are a few factors used for this
analysis. The above given factors often serve as an efficient evaluation tool. For simplicity
and better understanding, the factors are placed into different baskets as follows:
• Momentum Factors
• Growth Factors
• Value Factors
• Quality Factors
Edelweiss Securities Limited
4

Edelweiss Style Analysis
Why Multi Factor Model
Edelweiss multi factor model aims to diagnose right factor momentum to out perform the
benchmark by earning the alpha gains. Active investors like hedge funds, institutions, and
portfolio managers have been known to effectively profit from similar strategies. Considering
the volatility in equity markets, such an alternative investment can be effective in diversifying
the allocations and maximizing returns. Investment styles may be long portfolio, long
portfolio–short Nifty, or long–short portfolio.
Market in a bull run may augur well for a long portfolio style of investment, while in an
unstable market a long portfolio and short Nifty would be the preferred investment strategy.
In case of an uncertain market with negative bias, the long–short portfolio style of
investment is preferable. These strategies seem to be generating good returns on a
consistent basis and thus can be a preferred one during volatility where negative cues clearly
seem to outplay positive ones.
Edelweiss Securities Limited
5

Edelweiss Style Analysis
Edelweiss Style Analysis (ESA)
Introduction
Under dynamic market conditions, generation of Alpha returns is often the greatest challenge
confronting fund managers, which has underscored the increased importance of quantitative
stock picking. At the same time, for an active portfolio manager, a detailed understanding of
factor styles under changing market regimes is becoming increasingly important. Through
this research, we analyze the efficacy of fundamental and technical factors for stock selection
to complement the skill set of a portfolio manager.
Model description
The ability to predict the relative performance of various styles and successfully
implementing a strategy based on these predictions should have a positive effect on overall
investment returns. Indeed, as we have seen in our monitoring of investment performance
based on these styles over the years, being in appropriate groups (e.g., value, growth,
market cap) can make an enormous difference to investment success. This study examines
the efficacy of over 20 superior factors and back-test the each factor portfolio returns since
January 2003.
Single factor portfolio construction methodology: To construct long-short factor
portfolios, we rank stocks within the coverage universe by each factor every month, and
group them into five quintiles (quintile 1 contains the highest ranked stocks). For each factor,
we then calculate the one month subsequent performance of these five equally weighted
quintile portfolios, and compute the performance difference between the highest and lowest
quintiles (Q1–Q5), to arrive at a factor return.
Factor groups: Over 20 factors derived from fundamental and technical data base were
grouped into four categories—growth, momentum, value, and quality factors. (Explained in
detail later).
Back-test results for each static factor portfolio: We report the cumulative return of
portfolios based on single factor since January 2003.
Edelweiss Securities Limited
6

Edelweiss Style Analysis
Various Factor Groups
Momentum factor
Momentum investing has taken the Indian stock market by a storm over the past couple of
years. The essence of this stock strategy is to buy winners and sell losers. Within the
momentum factor, it is worth noting that the duration of past performance (12-month/6-
months/3months) will influence the type of strategy that should be employed.
Longer look back and optimal holding period produce more reliable returns that are
sustainable over the long term. In this study, a 12-month and 6-month look back and a onemonth
holding period appear to be optimal. This is consistent with our intuition that investors
under react to information over the medium term (3 months), thus justifying the 12-month
look back as optimal. Momentum factors have shown greater dependence on market regime
change on time to time basis.
The graph below shows cumulative returns of single factor portfolio with the base of 100 in
January 2003.
Momentum factor (Top-bottom Quintile returns %)
(Cumulative factor returns)
600
500
400
300
200
100
0
Feb-03
May-03
Aug-03
Nov-03
Feb-04
May-04
Aug-04
Nov-04
Feb-05
May-05
Aug-05
Nov-05
Feb-06
May-06
Aug-06
Nov-06
Feb-07
May-07
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
12 Month Price Momentum 6 Month Price Momentum
3 Month Price Momentum
Feb-09
Source: Edelweiss research
Edelweiss Securities Limited
7

Edelweiss Style Analysis
Growth factor
Growth style typically focuses on a company’s historical earnings growth to identify stocks
with the prospect of growing earnings at above-average rates versus the market. Managers
seek to invest in stocks of companies whose future earnings power has been underestimated
by markets. Growth is generally associated with greater upside potential, albeit with greater
risk on the downside.
From the growth factor chart below it is evident that none of the growth factors have given
incremental returns considering the fact that much of the weight has been given to price
momentum-driven factors all through out the bull market period.
Since June 2007, BVPS* growth has shown positive momentum, at the same time, EBITDA
growth has remained volatile, where as sales growth has continuously given negative returns
all through out the sample period.
Growth factor (Top-bottom Quintile returns %)
(Cumulative factor returns)
190
160
130
100
70
40
Feb-03
May-03
Aug-03
Nov-03
Feb-04
May-04
Aug-04
Nov-04
Feb-05
May-05
Aug-05
Nov-05
Feb-06
May-06
Aug-06
Nov-06
Feb-07
May-07
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
1 Year EPS Growth 1 Year Sales Growth 1 Year DPS Growth
1 Year CFPS Growth 1 Year BVPS Growth 1 Year EBITDA Growth
Source: Edelweiss research * Please refer appendix on page no 16.
Edelweiss Securities Limited
8

Edelweiss Style Analysis
Value factor
The value factor style of investing has exhibited cyclical behavior over time, but predicting
inflection points in these cycles has been a challenge for investors.
Value factors typically focus on existing assets and valuation measures that equate a stock’s
price to the company’s intrinsic value. The premise for value managers is that the market has
incorrectly priced a stock in relation to the firm’s current assets and earnings and the
company will be revalued over time, thereby to generate value for investors. Value is
traditionally associated with more moderate upside and greater downside protection over
market cycles than growth.
Looking at the value factor chart, market cap to sales and price to cash flow are two leading
factors which have performed consistently whereas price to earnings is favored in recent
market turmoil, on the other side EV/EBITDA is the worst performer in the value factor pack
all throughout the sample period.
The value factor pack has shown varied patterns under changing market conditions. Till mid-
2005 a couple of value factors were effective and had given incremental returns, but in the
later bull market, they have lost momentum and got penalized..
Value factor (Top-bottom Quintile returns %)
(Cumulative factor returns)
240
200
160
120
80
40
`
Feb-03
May-03
Aug-03
Nov-03
Feb-04
May-04
Aug-04
Nov-04
Feb-05
May-05
Aug-05
Nov-05
Feb-06
May-06
Aug-06
Nov-06
Feb-07
May-07
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
Price to Earnings Market Cap to Sales Price to Dividend
Price to Cashflow Price to Book value EV/FA
EV/EBITDA
Source: Edelweiss research
Edelweiss Securities Limited
9

Edelweiss Style Analysis
Quality factor
Besides the above conventional style factors, there are a couple of quality factors which have
shown a linear relationship with stock movement under different market conditions.
From the quality factor chart below it is evident that market cap (size) factor performance
during a market downturn was considerably higher than in other periods, indicating that at
every fall, large cap stocks are favored against small caps.
12-month price momentum/Beta is highly correlated to 12-month price momentum factor,
indicating that stocks with high return high Beta share the same characteristics as price
momentum factor in a bull market.
As witnessed globally during a bull market run, RoE does not play a significant role in
explaining the returns. Market players have ignored RoE throughout the bull run and as a
result it has remained flat with upward bias every time the market falls.
Quality factor (Top-bottom Quintile returns %)
360
(Cumulative factor returns)
300
240
180
120
60
`
0
Feb-03
May-03
Aug-03
Nov-03
Feb-04
May-04
Aug-04
Nov-04
Feb-05
May-05
Aug-05
Nov-05
Feb-06
May-06
Aug-06
Nov-06
Feb-07
May-07
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
ROE 12 Month Price Momentum / Beta Size
Source: Edelweiss research
Edelweiss Securities Limited
10

Edelweiss Style Analysis
Conclusion
In isolation, none of the factors outperform the broader index on consistent basis. Single
factor effectiveness can vary over time, depending on the prevailing market regime and no
single factor works consistently for every market condition. Fund managers can mitigate
challenges of timing style & sub-style cycles by engaging in active style management.
Discerning inflection points of style & sub-style cycles is difficult. Employing a more robust
mechanism to capture the prevailing style may help capture more returns.
Assessment of various styles & sub-style is necessary to better understand the implications of
equity allocations regardless of cycles, while increasing diversification.
Various permutations of styles can be explored to optimize the diversification and return
objectives of fund managers. Given the unpredictable nature and recent magnitude of style
cycles, fund mangers may be better served by choosing multiple investments within a substyle
category where characteristics and behavior together are complementary.
Edelweiss Securities Limited
11

Edelweiss Style Analysis
Market snapshot
In February 2009, 12-month price momentum, 6-month price momentum and Size have
worked well; indicating continued risk averse approached by investors where as growth
stocks have continued downward trend amid growing future growth concerns.
Top-bottom Quintile returns %
(50) (40) (30) (20) (10) - 10 20 30 40 50
* Benchmark = NIFTY (for illustration only)
Last 6 Month Last 3 Month Last Month
Source: Edelweiss research
Note: (1) All factor performance (for past six months: September 2008 to February 2009)
(2) Sorted on the descending order of previous month’s top performing factor
Edelweiss Securities Limited
12

Edelweiss Style Analysis
Edelweiss Multi Factor Model
The multi factor model aims to catch the style momentum under prevailing market conditions
to maximize the magnitude and stability of expected incremental performance. We have
presented a robust mechanism for exploiting market anomalies via quantitative multi-factor
stock selection model. The approach aims to extract independent sources of alpha under
prevailing market regimes. By performing out-of-sample back-tests, we can exploit alpha
opportunities for long only and long-short (benchmark and stocks) portfolios. Our research
continues to make a strong case for this type of style-driven approach, complementing
valuation-based active stock picking strategies and empowering a more holistic approach to
the investment process.
To catch the factor momentum we have applied the information coefficient (IC) to decide the
relative importance of the factors in a given month. IC entails to depict how well a factor is
correlated with (subsequent) returns. It is the correlation coefficient between the factor rank
and the return rank for all companies in the universe for a specific period.
The Alternative and Derivative Research team at Edelweiss has implemented the Quantitative
Stock Selection Model, and will provide monthly stock signals (long only and long-short) and
style shift analysis reports.
Methodology
Diagnosing the top three factors with high IC and significant level of IC T-stats on monthly
basis and complementing the same with factor’s top-bottom quintile performance (as
discussed above).
The multi-factor rank equal weighted portfolio are constructed applying top three factors with
high IC.
Edelweiss Securities Limited
13

Edelweiss Style Analysis
Back-Test Results
Edelweiss style analysis factor model (ESA factor model):
We back-tested the style analysis on BSE-100 Universe for last nine years (Since 2000) and
as expected results looks promising considering the hypothesis is applied on smaller universe
of approximately 80 stocks ( excluding financials ).
Further to this, sincere effort has been made to back-test hypothesis for 2000-2002 bear
market phase and results are consistent with later bull market period to ensure that results
are not excessively influenced by recent Bull Run.
Please note hypothesis has been back-tested using the same factors applied in earlier ESA
factor model except 12-months momentum to Beta whereas PEG ratio has been included in
back-test from Jan-2003 onwards.
ESA factor model versus benchmark observation
Long only and long-short (stock) rupee neutral portfolios have outpaced the benchmark
consistently, whereas the short portfolio has been consistently lagging the benchmark. As a
result, long-short (stock) spread is widening on a continuous basis, signifying EESA factor
model effectiveness.
Whereas long-short (NIFTY) rupee neutral portfolio has generated the similar returns as
compared to the benchmark with lesser volatility and high risk reward ratio (information
ratio).
The equity curve shows cumulative returns of a portfolio with a base of 100 since January
2000.
Edelweiss Securities Limited
14

Edelweiss Style Analysis
ESA factor model cumulative % return
2,500
2,000
1,500
1,000
500
0
Long Portfolio - Short Portfolio
Long Portfolio - Short NIFTY
NIFTY
Short Portfolio
Long Portfolio
Source: Edelweiss research
ESA factor model versus benchmark results
Long only and long-short (stocks) rupee neutral portfolios have outpaced the benchmark
consistently & has given average returns of 43% and 36% p.a. respectively Vs. NIFTY returns
of 15% p.a.
The long portfolio, long stocks-short NIFTY and long–short stocks portfolio has maintained
the 89%,100% & 100% hit ratio respectively on Y-o-Y basis, where as 66%, 55%, and 62%
respectively, M-o-M basis.
So, combining the observations, we can summarize that the long only portfolio stocks have
been able to beat the index fairly consistently and long-short (benchmark & stocks) rupee
neutral portfolios have consistently generated the Alpha and have been able to provide
significantly better returns with acceptable annualized information ratio of 0.7,1.1, and 1.3
respectively Vs. NIFTY information ratio of 0.4.
ESA factor model annualized performance (Y-o-Y)
200.0
(Return per year %)
150.0
100.0
50.0
0.0
(50.0)
(100.0)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009-
Long Portfolio
NIFTY
YTD
Long Portfolio - Short NIFTY
Short Portfolio
Long Portfolio - Short Portfolio
Source: Edelweiss research
Edelweiss Securities Limited
15

Edelweiss Style Analysis
ESA Annual return matrix (%)
Annual return matrix (%)*
Period Long portfolio NIFTY
Long portfolio -
Short NIFTY Short portfolio
Long portfolio - Short
portfolio
Jan00-Dec-00 1.5 (8.6) 10.5 57.8 64.3
Jan01-Dec-01 5.1 (7.8) 17.7 (9.4) 13.9
Jan02-Dec-02 41.0 4.2 32.7 (11.2) 29.1
Jan03-Dec-03 161.4 72.7 54.6 (37.1) 75.3
Jan04-Dec-04 32.1 5.3 24.6 (14.1) 18.2
Jan05-Dec-05 31.6 31.5 0.7 (23.7) 8.3
Jan06-Dec-06 44.4 36.3 4.8 (21.4) 18.2
Jan07-Dec-07 116.5 55.3 43.9 (22.8) 73.6
Jan08-Dec-08 (49.3) (52.5) 2.7 88.2 19.2
Jan09-Dec-09* (6.9) (4.6) (2.3) 10.7 3.3
Average return 42.7 15.2 21.4 0.7 35.6
Standard deviation 62.6 37.9 19.1 42.5 27.3
Information ratio (Times) 0.7 0.4 1.1 0.0 1.3
Source: Edelweiss research
Note: * Returns are calculated on cumulative basis.
ESA Monthly return matrix (%)
Monthly return matrix (%)
Long portfolio NIFTY
Long portfolio -
Short NIFTY Short portfolio
Long portfolio - Short
portfolio
Average 2.7 1.0 1.7 0.1 2.8
Best 41.8 15.7 34.4 43.4 38.5
Worst (24.5) (34.4) (11.1) (35.8) (28.1)
Standard deviation 10.6 8.0 6.5 10.2 9.1
Hit ratio 66% 59% 55% 46% 62%
Source: Edelweiss research
12-month rolling ESA monthly return matrix (%)
Monthly return matrix (%)
Period Long portfolio NIFTY
Long portfolio -
Short NIFTY Short portfolio
Long portfolio - Short
portfolio
Feb-08 5.2 (1.8) 7.0 3.6 8.7
Mar-08 (9.3) (9.4) 0.1 14.4 5.1
Apr-08 9.5 9.1 0.4 (10.8) (1.3)
May-08 0.3 (5.7) 6.0 7.5 7.9
Jun-08 (13.2) (17.0) 3.8 18.2 5.0
Jul-08 8.2 7.2 0.9 (13.3) (5.2)
Aug-08 0.0 0.6 (0.6) (3.6) (3.6)
Sep-08 (10.9) (5.7) (5.2) 12.8 1.9
Oct-08 (24.1) (34.4) 10.2 43.4 19.3
Nov-08 (0.3) 2.2 (2.5) 5.4 5.1
Dec-08 1.4 5.9 (4.5) (19.3) (17.9)
Jan-09 (6.3) (3.2) (3.1) 2.5 (3.8)
Feb-09 (0.60) (1.40) 0.80 8.00 7.40
Edelweiss Securities Limited
16

Edelweiss Style Analysis
APPENDIX
Factor definitions
Momentum factors
12 month / 6 months / 3 months price performance: Indicates acceleration /
deceleration in a stock’s price performance. High reading is preferred.
Growth factors
Earning per share (EPS) growth: Represents trailing 12-month EPS growth over the past
two corresponding years.
Sales growth: Represents trailing 12-month sales growth over the past two corresponding
years.
Dividend per share (DPS) growth: Growth in DPS indicates high earnings growth and/or
rising payout ratio over the past two reporting periods.
Operating cash flow per share (OCFPS) growth: Indicates high depreciation and/or high
net income and/or efficient working capital management over the past two reporting periods.
Book value per share (BVPS) growth: Book value represents the equity of the firm.
Growth in book value indicates and/or of high earnings growth and/or low payout ratio and/or
lesser conversion of convertibles or a low rights issue and/or equity issuance at greater than
bps.
EBITDA growth: Represents trailing 12-month EBITDA growth over the past two
corresponding years. Growth in EBITDA indicates high topline growth flowing down to the
EBITDA line or EBITDA margin expansion, i.e., good operational performance.
Value factors
Enterprise value ( EV ) to EBITDA: The ratio is meant to give a proxy for value of net
debt and equity divided by EBITDA. A low reading is an indication of good value for debt and
equity holder but can also indicates low EBITDA growth prospects.
Price to book: A low ratio indicates good value, but can also be an indication of lackluster
growth and/or profitability prospects.
Price to earnings: A low ratio indicates good value but can also be an indication of
lackluster growth prospects. The ratio is widely used due to its simplicity.
Price to sales: A low ratio indicates good value but can also be an indication of lackluster
growth prospects and/or low margins currently or in the future.
Price to DPS: A low ratio indicates high earnings growth and/or rising payout ratio, but can
also indicate lackluster growth prospects.
Price to operating cash flow per share (OCFPS): A low ratio indicates efficient working
capital management and/or high depreciation and/or high net income.
Enterprise value (EV) to fixed assets (FA): The ratio is meant to give a proxy for value of
net debt and equity divided by fixed assets available to debt and equity holders. A low
reading is an indication of good value for debt and equity holding but can also indicate lower
fixed assets efficiency level.
Edelweiss Securities Limited
17

Edelweiss Style Analysis
Quality factors
Return on equity (ROE): Defined as net income divided by common equity. A high ratio
indicates good operational performance and/or financial efficiency, and a high return to
equity shareholder. It also reflect ability to utilise assets effeciently to generate earnings.
Size: Indicates market capitalization of a company. Market capitalization is calculated by
multiplying a company’s shares outstanding by the current market price.
12-month performance/Beta: A high value implies that the stock has performed better
than would have been expected given its beta level, therefore favourable reward/risk profile.
Price earnings to growth (PEG): PEG is a widely used indicator of a stock’s potential value.
It is favored by many over the price/earnings ratio because it also accounts for
growth. Similar to the P/E ratio, a lower PEG means that the stock is more undervalued.
Information coefficient
The information coefficient (IC) is a concise measure of how well a factor is correlated with
(subsequent) returns. It is the correlation coefficient between the factor rank and the return
rank for all companies in the universe for a specific period.
Information coefficient is calculated as:
In order to calculate the significance of IC we have applied
IC T-Stat = sqrt [(n-2)/ (1-r × r)] × r
Where
n = # companies in the universe
r = the correlation coefficient between the two arrays (the IC)
Edelweiss Securities Limited
18

Edelweiss Style Analysis
Assumptions
(I)
Universe
ESA factor model: Strategy has been back-tested using BSE-100 universe.
Financial stocks have been excluded since many factors would have no clear meaning.
Companies with less than two year of financial history and one year trading history
have been excluded.
(II)
We consistently look at total returns: Many market participants look solely at
prices. But, it is important for investors to be aware of the total returns available from
stocks, in the form of capital gains (via price) and income (via dividends). Quite a lot
of factor effectiveness research looks solely at price returns, but we consistently use
total returns in our research.
(III) Our database has been carefully developed to minimize look-forward bias:
Many researchers use databases which make simple or even simplistic assumptions
about when new information became available. Frequently, this means that their “outof-sample”
results are actually contaminated by information that would not have been
available at the time. Obviously, investors should be skeptical about the results from
such work. We believe our database does not suffer from this problem.
(1V) What’s hot: This approach is suitable for stock picking within a defined universe,
where stocks have sufficient dispersion both in factors and in returns. If all stocks in a
particular market tend to move up and down together, then obviously a factor-based
approach will generally be less effective, because there will be less opportunity to use
factor effectiveness to distinguish between the best and worst performers.
(V)
It is important to note that long-short portfolio returns do not account for
transaction costs including the bid-ask spread and the market impact of buying and
selling.
(VI) Hit ratio: signifies number of month’s portfolio has given positive returns out of total
sample period.
(VII) Portfolio neutrality: Long-short (stocks or NIFTY) portfolio has been constructed and
back-tested keeping in mind least possible sector exposure at any given point of time.).
Edelweiss Securities Limited
19

Edelweiss Style Analysis
NOTES
Edelweiss Securities Limited
20

Edelweiss Securities Limited, 14 th Floor, Express Towers, Nariman Point, Mumbai – 400 021,
Board: (91-22) 2286 4400, Email: research@edelcap.com
Edelweiss Style Analysis
Naresh Kothari Co-Head Institutional Equities naresh.kothari@edelcap.com +91 22 2286 4246
Vikas Khemani Co-Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206
Nischal Maheshwari Head Research Nischal.maheshwari@edelcap.com +91 22 6623 3411
Alternative Research
Regular Products
Derivatives Daily (DD)
Earnings Strength Comparison (ESC)
Edelweiss Corporate Action Tracker (e CAT)
Edelweiss Fund Insight (EFI)
Edelweiss Market Scan (EMS)
Edelweiss Technical Reflection (ETR)
Edelweiss Value Scanner (EVS)
F&O Crossover
hEDGE
Insider Trades
Pair Strategy
Rollovers Analysis
RSC Tracker (RSC)
Special Situation Products
ADS Conversion
Alpha Trades
Buy Back
Delisting
De-Merger
Directional (Long / Short)
Merger
Open Offer
Option Trading
Restructuring (Value Unlocking)
Rights Arbitrage
Secondary Offerings
Spread Trade
Date
Special Report
Date
Monthly Report
03-Feb-09
IPO Radar 2009 – A snapshot
05-Feb-09
hEDGE: The alternative insights monthly
05-Nov-08
Edelweiss Value Scanner; Adding Value
to investments
05-Feb-09
RSC: Relative Strength Comparison
04-Feb-09
Edelweiss Style Analysis: What’s hot
20-Jan-09
Edelweiss Fund Insights - EFI
02-Feb-09
Enhanced Nifty: Nifty with an edge
27-Jan-09
Rollover Analysis
This document has been prepared by Edelweiss Securities Limited (Edelweiss). Edelweiss, its holding company and associate companies are a full service, integrated
investment banking, portfolio management and brokerage group. Our research analysts and sales persons provide important input into our investment banking
activities. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any
transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or
complete and it should not be relied on as such. Edelweiss or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that
may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to
be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this
document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in
this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment
discussed or views expressed may not be suitable for all investors. We and our affiliates, group companies, officers, directors, and employees may: (a) from time to
time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving
such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with
respect to any recommendation and related information and opinions. This information is strictly confidential and is being furnished to you solely for your
information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in
whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in
any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject
Edelweiss and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain
jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions.
The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this
information. This information is subject to change without any prior notice. Edelweiss reserves the right to make modifications and alterations to this statement as
may be required from time to time. However, Edelweiss is under no obligation to update or keep the information current. Nevertheless, Edelweiss is committed to
providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither
Edelweiss nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special
or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a
guide to future performance. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be
treated as endorsement of the views expressed in the report. Edelweiss Securities Limited generally prohibits its analysts, persons reporting to analysts and their
family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies
that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no
part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
Edelweiss Research is also available on Bloomberg EDEL , Thomson First Call, Reuters and Factset.
20
Copyright 2007 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved
Edelweiss Securities Limited
21