In this article, we will present the back tested performance of our StyleBoxes and show how “attractive” styles have outperformed “should-be-avoided” styles.
Let’s first understand the back testing setup.
For every StyleBox, we pick stocks in that StyleBox and create an equal-weighted portfolio every quarter. Thus, we have 10 such portfolios and we back test the performance of these portfolios using our standard back testing methodology.
Below we show back tested result for our StyleBox classification methodology.
As we can see, a portfolio that selects “super stocks” every quarter has delivered a CAGR of 36.4% (in the last 10 years). On the other hand, a portfolio that selects “Don’t touch” stocks every quarter has delivered a CAGR of 5.9%.
These are back tested data starting from 30th April 2013 till 8th May 2023.
This is an important point to note.
We did the classification first and then back tested and not the other way around. Our classifications are solely based on factor scores and the cutoffs are in no way guided by back tested results (to avoid overfitting). However, do note that these are still back tested results, and all standard disclaimers apply.