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Sabrient’s VCU strategy is designed to identify stocks with strong current and future growth prospects, along with a favorable current and projected valuation with a high likelihood of earnings. The strategy employs a multi-factor model with metrics for GARP valuation, absolute growth, analyst consensus changes, and forensic accounting and governance, all of which work together to assess a company’s general outlook. This culminates in a forward-looking quant model by which the given stock universe is ranked. The VCU Strategy can be used to create a long only or along/short portfolio and can be applied to sectors to create unique sector strategies, such as sector pairs or enhanced sector rotation. Portfolio Construction The eligible universe is Sabrient’s database of more than 5,000 U.S. stocks and ADRs, narrowed by two constraints: The Stock price must be $10 or greater, and there must be at least three Wall Street analysts covering the stock. Risk management constraints can be tailored to the client’s preference. Generally, we use these:
- Sector/industry concentration limited to 25% in any one sector; 12.5% in any one industry. On a long/short portfolio these percentages are applied to both the long side and the short side;
- Daily trading volume threshold is $2 million;
- On a long/short portfolio, the minimum price for longs is $10; the minimum price for shorts is $15.
The Layering Effect Because the VCU strategy has historically proven adept at layering the predicted performance of a given stock universe, as shown in the “rainbow chart,” it can be quite useful for indexing or position weighting of a given portfolio. Portfolios using our VCU+ strategy also can be ranked top-to-bottom in a manner that allows for options overlays, and the strategy is orthogonal to most other products. Performance The VCU strategy has been scientifically backtested in a number of different types of portfolios—long only, long/short, dynamic weighting, rolling 13 week holding periods—with the following results:
- 12-month annualized return: 8.2% to 16.8%
- 24-month annualized return: 14.2% to 38.6%
- 10.5-year annualized return: 29.9% to 33.5%
When used with a Trend-Following Technical Overlay, the Dynamic Long/Short Portfolio achieved spectacular annualized returns of 40.6% (24-month test) and 47.4% (10.5-year test). The Dynamic Long/Short Portfolio achieved spectacular results Here are details on the backtest, along with performance tables and charts.