Enhancing Growth Portfolio: G-Score with Low BM Tilting

Summary (Eng)

Growth Stock have been doing well lately. IWF, an ETF based on Growth Stock in the past 5 years, is, observed to outperform SPY, an ETF tracking the S&P 500. Growth Stocks usually mean companies with low book-to-market(BM). A low BM means that the market value is too high or the book value is low, and the high market value is likely to change into a bubble if such an increase in firm’s value is not achieved. As these growth stocks are exposed to downside risks, fundamental analysis is important. Fundamental analysis is a traditional investment method and is considered an important factor from the past to the present. By combining the results of fundamental analysis with growth stocks, growth stock’s exposure to downward risk can be reduced and the probability of mispricing can be greatly reduced.

Mohanram(2005) suggested G-Score as a model that expanded F-Score in terms of growth. G-Score captures a company’s growth signal by adding several variables and growth variables that were covered in the existing F-Score, and the costs that are considered as intangible assets such as R&D Expense and Advertisement Expense that have been in the spotlight recently. We maximize the effectiveness of the strategy through fundamental analysis based on this growth and Low BM tilting that gives more weight to growth stocks.

When examining the performance of entire period, it was confirmed that G-Score achieved excess returns. The results of low BM tilting on the G-Score showed better results than the general G-Score. In the result of the past 5 years, it was observed that the explanation and robustness of the factor also became more pronounced in recent years. Furthermore, even when comparing the performance of F-Score and G-Score showed better performance in recent years.