O'Shaughnessy developed and tested the strategies in his book using data from 1927 to 2009 (1964 to 2009 for the ones I've discussed) and the results he presents are considered "in-sample." He attempted to assure that the strategies' performance were not the result of random chance by using the t-statistic, but a better way to be sure is to test the strategies "out-of-sample."
Using Portfolio123, I've recreated the trending value, consumer staples value, and utilities value strategies and backtested them from the beginning of 2010 to the present.
|Out-of-Sample Return % (Jan 2010 - June 2016)|
|Out-of-Sample Performance Metrics (Jan 2010 - June 2016)|
The utilities value strategy has lagged over this time period, which has happened in the past and is bound to happen for any long-term strategy. Periods of underperformance are quantified by base rates (look into base rate fallacy for another example how investors tend to neglect past performance in favor of recent information). The base rates for the utilities value strategy between 1968 and 2009 tell us that this strategy underperforms its benchmark 13% of the time on a 7-year rolling basis.
So do you abandon ship? Or trust the base rates? Most investors, amateur and professional, would do the former, poking holes in the efficient market hypothesis (Forbes recommends reevaluating a professional asset manager after just 3 quarters of underperformance! Many times managers that are fired for short-term underperformance go on to outperform again after being fired).
Instead of jumping ship, a reasonable recommendation would be to use multiple strategies in your portfolio. This will help you emotionally weather the storm of one strategy underperforming for a year or several years.
Stay tuned for the stocks that these strategies are currently pointing to. Happy trading!
Please post any questions, comments, or suggestions you have below.