midf sisma

26 October 2017 | Strategy-Quant

Enhancement of Piotroski F Score Portfolio Return with ERP5 Overlay Strategy

Strategy Team | [email protected] FBM KLCI: 1,739.05 points

2017 Year-end Target: 1,830 points

OBJECTIVE The objective of this study is to gauge whether combining two value quantitative strategies, namely 1) Piotroski F Score, and 2) ERP5 (modified), can further enhance portfolio return relative to the benchmark FBM KLCI Index. STRATEGIES 1) Piotroski F Score is the value strategy adopted to discover financially sound companies in the investment universe of any Portfolio Manager (refer to our Strategy-Quant report dated 13 October 2017). The Piotroski score reflects the nine criteria used to determine the strength of a firm's financial position. The Piotroski score (between 0-9) is used to determine the best financially sound companies, nine being the best. The score was named after Chicago Accounting Professor, Joseph Piotroski who devised the scale according to specific criteria found in the financial statements. Piotroski recognized that, although it has long been shown that financially sound/value stocks (or high book-tomarket firms as he calls them) have strong returns as a group, there is nevertheless very wide variability in terms of the returns of these stocks. He noted that: “Embedded in that mix of companies, you have some that are just stellar. Their performance turns around. People become optimistic about the stock and it really takes off [but] half of the firms languish; they continue to perform poorly and eventually de-list or enter bankruptcy.” What he wondered was whether it was possible to weed out the poor performers and identify the winners in advance. He therefore sought to develop a simple accounting-based stock selection strategy for evaluating a stock’s financial strength. 2) ERP5 (modified) value strategy adopted for this study is a combination of (i) ERP5, a 4-factor (i.e. Earnings Yield, ROIC, P/B ratio, 5-year average ROIC) investment strategy developed by Philip Vanstraceele and Luc Allaeys, and (ii) the Price Momentum factor as advocated by Philip Vanstraceele and Tim Du Toit in their research paper, “Quantitative Value Investing in Europe: What works for achieving Alpha”. This hybrid value strategy is called ERP5 (modified). Refer to our Strategy-Quant report dated 4 October 2017. STUDY PARAMETERS All stocks on Bursa Malaysia were tested for period from January 2007 to September 2017. The FBM KLCI Index was used as the benchmark to gauge relative performance. The 1st filter for all stocks was the 9-point Piotroski F Score to discover truly financially sound companies. To get the Piotroski F Score, all companies were scored on each of the 9 factors as per below: 1. 2. 3. 4. 5. 6.

Positive net income, Positive operating cash flows, Higher return on assets than the previous year, Operating cash flows greater than net income, Lower debt than the previous year, Higher current ratio than the previous year,

MIDF RESEARCH is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures

MIDF RESEARCH Thursday, 26 October 2017 7. 8. 9.

Less stock dilution than the previous year, Higher gross margin than the previous year, and Higher asset turnover than the previous year.

Each factor score was either 1 (meeting the criteria) or 0 (not meeting the criteria). These scores were then added together to arrive at the Piotroski score for each company. Companies with the highest score are the most financially sound companies hence the most attractive investment ideas. In this study, only stocks that scored 6 and above (with 9 being the highest possible) were used in portfolios at beginning of each year. The 2nd filter… The stocks filtered by Piotroski F Score were again filtered a second time using the ERP5 (modified) which compares companies on a relative basis using 5 factors as mentioned in previous report. To get the ERP5 (modified) score, all companies were scored on each of the five factors, i.e. Earnings Yield, ROIC, P/B ratio, 5-year average ROIC, and Price Momentum. These score were then added together to give the ERP5 (modified) score of the company. Companies with the lowest sum of factors score are the most attractive investment ideas. …gauged on multiple price momentum. The stock price momentum used for the testing was 3-, 6- and 12month momentum. This was to gauge which of the different time frame gave superior returns in the Malaysian context. Selected stocks were divided into Quintile portfolios… The stocks selected from the Piotroski F Score were then divided into five equal groups (quintiles) based on the ERP5 factors scoring. The best 20% of companies with lowest sum of factors score were put in the first quintile (Q1), the next in the second 20%, and so on, with the 20 % of companies with the highest sum of factors score in the fifth quintile (Q5). …on equal-weighted basis… In addition, the portfolios were all constructed on an equal-weighted basis. The benefits of equal weighted portfolios were explained in our previous ERP5 (modified) report dated 4 October 2017. …and tested on 12-month holding period. Only 12-month holding period was used in this study. All the back test portfolios were tested based from beginning of the year. FINDINGS It works. The results of our study proved the combined 2 strategies, i.e. Piotroski F Score & ERP5 (modified), outperformed both the FBM KLCI Index and the single factor Piotroski F Score convincingly. Hence fund managers can improve their performance by using the Piotroski F Score as a first filter to find financially sound companies and then using ERP5 (modified) to find stocks that are undervalued. Buying stocks with deep intrinsic value on fundamental strength is historically proven to be a superior system than simple stock market averages. Lower transaction cost. This quant strategy also saves transaction cost with once a year rebalance. Fund managers who wish to be more active can rebalance twice a year with very decent results. Original authors of the system recommend longer term to let the value premium be realized. Reaffirms Graham’s portfolio focus. The results again proved that the portfolio focus strategy advocated by Benjamin Graham, i.e. investors should form a diversified portfolio based on a few simple criteria focusing on the results of the group instead of individual stocks, is also applicable in the Malaysian context. Recommended to stay away from the laggards. Based on our studies, even with the strong financials that the Piotroski screener demands, they are not enough to predict price turnaround of stocks that have been consistent laggards in the past. Tables of numerical results. Please refer to OVERALL FINDINGS on pages 6-10. Conclusions. Please refer to CONCLUSIONS on page 11.

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MIDF RESEARCH Thursday, 26 October 2017 RECOMMENDATIONS Recommended portfolio of stocks

Quantitative-based selections

Stock Name

Current Price 25-Oct (RM)

Forecast-based fundamental return expectations and recommendations MIDFR Target Price (RM)

Exp. Price Return (%)

Exp. Dividend Yield (%)

Exp. Total Return (%)

MIDFR Recommendation

Inari Amertron

2.83

2.29

-19.1

4.5

-14.6

NEUTRAL

Airasia

3.28

3.94

20.1

3.7

23.8

BUY

Airasia X

0.375

0.43

14.7

0.0

14.7

NEUTRAL

Hartalega

7.68

6.99

-9.0

0.9

-8.1

NEUTRAL

Oldtown

2.56

3.10

21.1

3.1

24.2

NEUTRAL

IOI Corp

4.46

5.27

18.2

5.2

23.4

BUY

Sime Darby

9.08

9.05

0.3

2.7

3.0

NEUTRAL

Malaysia Airport

8.37

9.98

19.2

1.4

20.6

BUY

Sapura Energy

1.44

1.69

17.4

0.7

18.1

NEUTRAL

Source: MIDFR, Bloomberg Based on our latest Piotroski F Score and ERP5 (modified) screenings as at 25 October 2017, an equal-weighted portfolio consists of 9 stocks listed in table above is likely to outperform the benchmark FBM KLCI Index in the upcoming 12-month holding period. This is despite only 3 out of the 9 recommended stocks are currently in the Buy List of our forecast-based fundamental research.

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MIDF RESEARCH Thursday, 26 October 2017 Macro Strategy

:

Stock Selection using Quantitative Selection Strategy

Strategy Types

:

Value & Momentum Play Investing - (Benjamin Gram’s Net Current Asset Value, Joseph Piotroski’s F-Score and Altman Z Score)

This Strategy

:

Enhance Piotroski’s F-Score Return with ERP5 Overlay

Strategy Concept

:

Combining two quantitative value strategies namely the Piotroski F Score to find financially sound companies on the Bursa and using ERP5 as an overlay to find companies that are undervalued. Recap the two previous reports Quantitative Strategy: Piotroski F Score – is the Value strategies adopted for this study this time. The Piotroski score is a discrete score between 0-9 which reflects nine criteria used to determine the strength of a firm's financial position. The Piotroski score is used to determine the best value stocks, nine being the best. The score was named after Chicago Accounting Professor, Joseph Piotroski who devised the scale according to specific criteria found in the financial statements. He developed the F-Score back in 2000 while at the University of Chicago. Piotroski recognized that, although it has long been shown that value stocks (or high book-tomarket firms as he calls them) have strong returns as a group, there is nevertheless very wide variability in terms of the returns of these stocks. He noted that: “Embedded in that mix of companies, you have some that are just stellar. Their performance turns around. People become optimistic about the stock, and it really takes off [but] half of the firms languish; they continue to perform poorly and eventually de-list or enter bankruptcy.” What he wondered was whether it was possible to weed out the poor performers and identify the winners in advance. He therefore sought to develop a simple accounting-based stock selection strategy for evaluating a stock’s financial strength. The F-score he developed essentially looks for companies that are profit-making, have improving margins, don't employ any (obvious) accounting tricks, and are strengthening their balance sheets. The score consists of nine variables are split into three groups: • • •

Profitability Balance sheet health, and Operating efficiency.

ERP5 (modified). The Value strategies adopted for this study are (i) ERP5, a 4-factor (i.e. Earnings Yield, ROIC, P/B ratio, 5-year average ROIC) based Value investment strategy developed by Philip Vanstraceele and Luc Allaeys, and this is enhanced by incorporating (ii) the price momentum factor as advocated by Philip Vanstraceele and Tim Du Toit in their research paper, “Quantitative Value Investing in Europe: What works for achieving Alpha”. This hybrid value strategy is called ERP5 (modified). It is notable that this strategy only uses historical accounting data and no forecasts. Momentum Factors Relative Strength The fifth factor, which is momentum built into the ERP5 Modified (2 nd last recent report), with the idea behind it is that, relative strength is used to find companies with the best performing stock prices; the ones that have gone up or going up in price the over a specific period of time. In his book, ‘What works on Wall Street’, James O'Shaughnessy calculated relative strength by looking at the price increase of a stock over the past year. Looking at the change in stock prices over a year, he found that winners seem to continue to win and the losers kept on loosing. Thus, this study first sets out to also see if relative strength can separate winners from losers. Then with the multiple strategy portfolios, see if the combination of reasonable priced stocks with momentum can give you even higher excess returns. In this paper only historical accounting data were used and no forecasts for both techniques. The reason being is that there is ample evidence that forecasts cannot be relied on. For example, in his excellent book, ‘The New Contrarian Investment Strategy’, David Dreman mentioned a study that used a sample of 67.375 analysts' quarterly estimates for companies listed on US stock exchanges. The study found that the average analysts’ error was 40%, and that the estimates were misleading two-third of the time! A less important but not insignificant factor is that HISTORICAL ACCOUNTING DATA IS ALSO CHEAPER.

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MIDF RESEARCH Thursday, 26 October 2017 This Study Rationale

:

The objective of this study is to gauge whether combining the two quantitative strategies, the Piotroski F Score and the ERP5 Modified can:i. ii. iii. iv.

enhance portfolio returns, outperform the FBMKLCI Index, outperform the single factor Piotroski F Score on its own, and is the Single Factor Piotroski F Score better than the FBMKLCI Index and better than the combined strategy vs the FBMKLCI Index.

Let’s take a look at a backtest of Piotroski F-Score and ERP5 and see how it works. 1. 2. 3. 4. 5. 6. 7.

This backtest uses the companies on the Bursa (893 companies at screening date). Market Cap filter – RM1 Billion Trading volume – above 500K per day (liquidity purposes) The date used to screen the stock is each year were the end of the previous year i.e. 31 Dec The returns were calculated every year from January to end of the year except 2017 which was up to September 2017. The returns were put in buckets, to examine how the top stocks with scores of 6 and above weeded by Piotroski score and enhanced with ERP5 overlay perform against the FBMKLCI Index. The stocks were screened in prior year, and purchased at start and sold at end of the current year.

Each year, all the portfolios we tested were screened in prior year on last date of year being December 31 and formed on 1 January. The annual returns for our back test portfolios were calculated as the 12-month price change excluding dividends received. The portfolios were all constructed on an equal-weighted basis. In order to test the effectiveness of a strategy, the universe obtained from the results from the initial Piotroski filter were then divided into five equal groups (quintiles), according to the ERP5 Modified strategy being tested. The cheapest 20% of companies were put in the first quintile (Q1), the next in the second, and so on, with the 20 % of companies with the highest price-to-book value in the fifth quintile (Q5). A good factor or strategy is defined as one where: •

The top quintile (Q1) outperforms the bottom quintile (Q5) over the 12 years we back tested and

•

There must be a linearity of returns among the quintiles (quintile one must outperform quintile 2 which must outperform quintile 3, up to quintile 5) over the 12 years we tested, and

•

The strategy must also consistently outperform the market over time. We defined consistent outperformance when the first quintile (Q1) outperformed the market portfolio 60% or more of the time.

So, in summary, we are looking for factors that increase the probability of positive returns, beat the market, and how strong or weak this probability is.

Summary Portfolio Rebalanced

:

every beginning of year with 12-Month Holding Period

Portfolio Price Momentum

:

3-, 6-, and 12-Month price Momentum

Back Test Period

:

10.75 Years

Results Tabled

:

Summary based on 10.75 Years data

Period Start

:

01-Jan-2007

Period End

:

31-December every year except 2017 which was in September

Index Observed

:

1 – FBM KLCI Index

Stocks Observed

:

893 stocks

No. of observations

:

375,060

Ave. observation/stock

:

420

5

MIDF RESEARCH Thursday, 26 October 2017 OVERALL FINDINGS

:

For the 10.75 year period under review there were only 196 stocks that met the criteria score of above 6 out of 893 stocks on the Bursa. Only 2 (1.02%) stocks that met all the 9 criteria of financially sound companies as laid out by Piotroski F Score. This was Hap Seng Plantations Holdings in 2012 and QL Resources in 2015. Only another 18 (9.18%) were in the next best category 8. Category 7 was populated by another 76 stocks (38.78%) while the bulk numbering 100 (51.02%) was made up by the category 6 stocks.

Piotroski F Score Category

No. Stocks

% Of

9

2

1.02

8

18

9.18

7

76

38.78

6

100

51.02

Total

196

100.00

6

MIDF RESEARCH Thursday, 26 October 2017 Answering question i. whether the combined 2 strategies can enhance returns, the answer is a resounding “YES” most of the time in the 10.75 years of period under review as per below tables.

Performance Comparison - Combined Piotroski F Score & ERP5, Single Factor Piotroski F Score Vs FBMKLCI Index

Momentum 1. Combined 2 Strategy vs FBMKLCI Index Average

3 Months Momentum

RETURNS 6 Months Momentum

12 Months Momentum

Out / Out / Out / Piotroski ERP5 > Piotroski ERP5 > Piotroski ERP5 > FBMKLCI Under FBMKLCI Under FBMKLCI Under F Score & FBMKLCI F Score & FBMKLCI F Score & FBMKLCI Index PerforIndex PerforIndex PerforERP5 Index ERP5 Index ERP5 Index mance mance mance 64.78 6.64 58.15 YES 72.40 6.64 65.76 YES 54.38 6.64 47.74 YES

2. Combined 2 Out / Strategy vs Piotroski Piotroski Under Single Factor F Score & F Score PerforPiotroski F ERP5 mance Score Average 64.78 34.62 30.16

Out / ERP5 > Piotroski Piotroski Under Piotroki F Score & F Score PerforF Score ERP5 mance YES

72.40

34.62

37.78

Out / ERP5 > Piotroski Piotroski Under Piotroki F Score & F Score PerforF Score ERP5 mance YES

54.38

34.62

19.76

ERP5 > Piotroki F Score YES

3. Single Factor Out / Piotroki Out / Piotroki Out / Piotroki Piotroski F Piotroski FBMKLCI Under F Score > Piotroski FBMKLCI Under F Score > Piotroski FBMKLCI Under F Score > Score vs F Score Index Perfor- FBMKLCI F Score Index Perfor- FBMKLCI F Score Index Perfor- FBMKLCI FBMKLCI Index mance Index mance Index mance Index Average 34.62 6.64 27.98 YES 34.62 6.64 27.98 YES 34.62 6.64 27.98 YES

From the table above, it was observed that irrespective of momentum period used:1.

The top part of the table shows that the combined 2 strategy outperformed overwhelmingly the FBMKLCI Index in all momentum periods. The average returns was between 72.4% (6 months momentum) on the high side and 54.38% (12 months momentum) on the low side compared FBMKLCI Index average return of only 6.64% for the 10.75 years period under review. Thus, an overwhelming performance at the minimum 47.74% at the minimum (12 Months momentum) with the high side out performance of 58.15% (3 months momentum).

2.

The middle table shows that the combined 2 strategy also outperformed overwhelmingly the single factor Piotroski F Score for all momentum periods. The combined 2 strategy average returns was between 72.4% on the high side and 54.38% on the low side compared to the single Factor F Score average return of 34.62% for the period under review. An overwhelming performance at the minimum 19.76% at the minimum (12 Months momentum) with the high side out performance of 37.78% (6 months momentum).

3.

The bottom part of the table shows that the single factor Piotroski F Score was also able to outperform the FBMKLCI Index albeit at lower margin of 34.62% (almost 60% of the combine 2 strategy return of 54.38% for the 12 months momentum). Here the single Factor Piotroski’s F Score average returns was 34.62% compared to FBMKLCI’s Index average return of 6.64% for the period under review. Still and overwhelming out performance of 27.98%

From the results in table above it is observed that whether using the combined 2 strategies or the single factor Piotroski’s F Score, both are able to outperform the FBMKLCI Index hands down.

7

MIDF RESEARCH Thursday, 26 October 2017 Answering question ii. whether the combined 2 strategies can outperform the FBMKLCI Index, the answer is a resounding “YES”, most of the time, to be exact 9 times or 83.7% of the time in the 10.75 years of period under review. See table of performance below. 1.

Piotroski F Score & ERP5 Combined strategy versus FBMKLCI Index performance

Summary ERP5, Piotroski F Score and FBMKLCI Index Performance from Jan 2007 to Sep 2017 1. Combined 2 Strategy vs FBMKLCI Index RETURNS 6 Months Momentum

3 Months Momentum

12 Months Momentum

Out / Out / Out / Piotroski ERP5 > Piotroski ERP5 > Piotroski ERP5 > FBMKLCI Under FBMKLCI Under FBMKLCI Under F Score & FBMKLCI F Score & FBMKLCI F Score & FBMKLCI Index PerforIndex PerforIndex PerforERP5 Index ERP5 Index ERP5 Index mance mance mance 2007 100.54 31.82 68.73 YES 100.54 31.82 68.73 YES 100.54 31.82 68.73 YES 2008 (44.32) (39.33) (5.00) No (131.18) (39.33) (91.86) No (104.79) (39.33) (65.46) No 2009 291.02 45.17 245.85 YES 258.06 45.17 212.89 YES 291.02 45.17 245.85 YES 2010 46.98 19.34 27.64 YES 46.98 19.34 27.64 YES 28.75 19.34 9.41 YES 2011 74.39 0.78 73.62 YES 118.71 0.78 117.93 YES 65.29 0.78 64.51 YES 2012 34.85 10.34 24.52 YES 200.70 10.34 190.36 YES 126.18 10.34 115.84 YES 2013 70.62 10.54 60.08 YES 59.49 10.54 48.95 YES 59.49 10.54 48.95 YES 2014 83.98 (5.66) 89.64 YES 88.55 (5.66) 94.21 YES (4.42) (5.66) 1.24 YES 2015 13.95 (3.90) 17.86 YES 13.95 (3.90) 17.86 YES 30.79 (3.90) 34.69 YES 2016 (6.24) (3.00) (3.24) No (6.24) (3.00) (3.24) No (41.51) (3.00) (38.51) No 2017 46.85 6.93 39.91 YES 46.85 6.93 39.91 YES 46.85 6.93 39.91 YES Average 64.78 6.64 58.15 72.40 6.64 65.76 54.38 6.64 47.74 Year

Max 291.02 Min (44.32)

45.17 (39.33)

245.85 (5.00)

No. Years Combined Strategy Outperformed FBMKLCI Index % Of 10.75 Years

258.06 (131.18)

45.17 (39.33)

212.89 (91.86)

291.02 (104.79)

45.17 (39.33)

245.85 (65.46)

9

9

9

83.7%

83.7%

83.7%

From the table above, it can be observed that irrespective of momentum period used, the combined strategy outperformed overwhelmingly the FBMKLCI Index. As mentioned in literature above, Momentum is used to capture the upside as value stocks that are not moving in terms of stock price is not desirable. The combined strategy using the 3, 6 and 12 months momentum out performed 9 times (2nd last row) out of the 10.75 years or 83.7% of the time for all momentums in the period reviewed. This performance met the good strategy requirement of being above 60% consistent performance as required by most literature. The out performance against FBMKLCI was huge being above 54% at the minimum for all momentums. The FBMKLCI Index could only muster an average of 6.64% for the period reviewed. Maximum return for the combined strategy was 291.02% against FBMKLCI index best of 45.17%. Only in year 2008 and 2016 did the combined strategy did not perform well as those were very difficult years for the stock market as a whole.

8

MIDF RESEARCH Thursday, 26 October 2017 Answering question iii. whether the combined 2 strategies can ENHANCE RETURN and outperform the single factor Piotroski F Score, the answer is a resounding “YES”, most of the time. To be exact at least 7 times or 65.1% of the time at the lower end of performance in the 10.75 years of period under review. See table of performance below. 2.

Piotroski F Score & ERP5 Combined strategy versus Single Factor Piotroski Score

Summary ERP5, Piotroski F Score and FBMKLCI Index Performance from Jan 2007 to Sep 2017 2. Combined 2 Strategy vs Piotroski F Score 3 Months Momentum

RETURNS 6 Months Momentum

12 Months Momentum

Q1

Q1

Q1

Year

Out / Piotroski Piotroski Under F Score & F Score PerforERP5 mance 2007 100.54 72.98 27.56 2008 (44.32) (133.02) 88.70 2009 291.02 211.50 79.53 2010 46.98 7.49 39.49 2011 74.39 70.53 3.86 2012 34.85 12.06 22.80 2013 70.62 (44.82) 115.44 2014 83.98 116.56 (32.58) 2015 13.95 41.59 (27.63) 2016 (6.24) (47.45) 41.21 2017 46.85 73.41 (26.57) Average 64.78 34.62 30.16 Max 291.02 Min (44.32)

211.50 (133.02)

Out / ERP5 > Piotroski Piotroski Under Piotroki F Score & F Score PerforF Score ERP5 mance YES 100.54 72.98 27.56 YES (131.18) (133.02) 1.84 YES 258.06 211.50 46.56 YES 46.98 7.49 39.49 YES 118.71 70.53 48.17 YES 200.70 12.06 188.64 YES 59.49 (44.82) 104.31 No 88.55 116.56 (28.02) No 13.95 41.59 (27.63) YES (6.24) (47.45) 41.21 No 46.85 73.41 (26.57) 72.40 34.62 37.78

Out / ERP5 > Piotroski ERP5 > Piotroski Under Piotroki F Score & Piotroki F Score PerforF Score ERP5 F Score mance YES 100.54 72.98 27.56 YES YES (104.79) (133.02) 28.23 YES YES 291.02 211.50 79.53 YES YES 28.75 7.49 21.25 YES YES 65.29 70.53 (5.25) No YES 126.18 12.06 114.12 YES YES 59.49 (44.82) 104.31 YES No (4.42) 116.56 (120.98) No No 30.79 41.59 (10.80) No YES (41.51) (47.45) 5.94 YES No 46.85 73.41 (26.57) No 54.38 34.62 19.76

258.06 211.50 (131.18) (133.02)

291.02 211.50 114.12 (104.79) (133.02) (120.98)

115.44 (32.58)

No. Years Combined Strategy Outperformed Piotroski F Score % Of 10.75 Years

188.64 (28.02)

8

8

7

74.4%

74.4%

65.1%

From the table above, it was observed that the combined 2 strategy outperformed Piotroski F Score overwhelmingly. The combined strategy using the 3, 6 and 12 months momentum out performed at worst 7 times only (2nd last row) or 65.1% of the time which quite impressive as it met the good strategy benchmark of consistently out performing 60% of the time for the period reviewed. The out performance against single factor Piotroski F Score was also considered huge being at least above 1.5 times the Piotroski performance at the low end with a return of 54.38% against the Piotroski F Score return of 34.62%. The single factor Piotroski outperformed the combined 2 strategy in 3 years only being 2011, 2014 and 2015. As the 2017 period has not ended the underperformance in 2017 as at September 2017 is not conclusive. Maximum return for the combined strategy was 291.02% against Piotroski’s best of 211.5%. Both strategies was hit hardest in both 2008 and 2016 with the combined 2 strategy coming out on top.

9

MIDF RESEARCH Thursday, 26 October 2017 Answering question iv. Whether the Single Factor Piotroski F Score returns are better than the FBMKLCI Index and better than the combined strategy vs the FBMKLCI Index. The answer is a resounding “No”. From previous table above, it is observed that the combined 2 strategy outperformed the Piotroski’s F Score. 3.

Single Factor Piotroski Score versus FBM KLCI Index

Summary ERP5, Piotroski F Score and FBMKLCI Index Performance from Jan 2007 to Sep 2017 3. Single Factor Piotroski F Score vs FBMKLCI Index 3 Months Momentum Out / Piotroki Piotroski FBMKLCI Under F Score > F Score Index Perfor- FBMKLCI mance Index 2007 72.98 31.82 41.16 YES 2008 (133.02) (39.33) (93.70) No 2009 211.50 45.17 166.33 YES 2010 7.49 19.34 (11.84) No 2011 70.53 0.78 69.76 YES 2012 12.06 10.34 1.72 YES 2013 (44.82) 10.54 (55.36) No 2014 116.56 (5.66) 122.22 YES 2015 41.59 (3.90) 45.49 YES 2016 (47.45) (3.00) (44.45) No 2017 73.41 6.93 66.48 YES Average 34.62 6.64 27.98 Year

Max 211.50 Min (133.02)

45.17 (39.33)

166.33 (93.70)

No. Years Piotroski F Score Outperformed FBMKLCI Index % Of 10.75 Years

RETURNS 6 Months Momentum

12 Months Momentum

Out / Piotroki Piotroski FBMKLCI Under F Score > F Score Index Perfor- FBMKLCI mance Index 72.98 31.82 41.16 YES (133.02) (39.33) (93.70) No 211.50 45.17 166.33 YES 7.49 19.34 (11.84) No 70.53 0.78 69.76 YES 12.06 10.34 1.72 YES (44.82) 10.54 (55.36) No 116.56 (5.66) 122.22 YES 41.59 (3.90) 45.49 YES (47.45) (3.00) (44.45) No 73.41 6.93 66.48 YES 34.62 6.64 27.98

Out / Piotroki Piotroski FBMKLCI Under F Score > F Score Index Perfor- FBMKLCI mance Index 72.98 31.82 41.16 YES (133.02) (39.33) (93.70) No 211.50 45.17 166.33 YES 7.49 19.34 (11.84) No 70.53 0.78 69.76 YES 12.06 10.34 1.72 YES (44.82) 10.54 (55.36) No 116.56 (5.66) 122.22 YES 41.59 (3.90) 45.49 YES (47.45) (3.00) (44.45) No 73.41 6.93 66.48 YES 34.62 6.64 27.98

211.50 (133.02)

211.50 (133.02)

45.17 (39.33)

166.33 (93.70)

45.17 (39.33)

166.33 (93.70)

7

7

7

65.1%

65.1%

65.1%

From the table below it is observed that the Single Factor Piotroski F Score does outperform the FBMKLCI Index most of the time (7 times or 65.1% out of 10.75 Years), but the magnitude is lower than the 2 combined strategy of Piotroski F Score. The Single Factor Piotroski F Score average returns for the period was below 40% for all momentum throughout the period reviewed. This is in contrast to the combined 2 strategy average return performance whose average return was at least 50% at the minimum throughout the period for all momentums. It can be observed that the Single Factor Piotroski F Score also outperformed the FBMKLCI Index convincingly as the returns for the period under review were also above 30%. The returns are also quite impressive as it also met the good strategy benchmark of consistently out performing 60% of the time for the period reviewed. However, this strategy underperformed the FBMKLCI Index in 4 years (2008, 2010, 2013 and 2016). Maximum return for Single Factor Piotroski F Score was 34.62% against FBMKLCI Index return of 6.64%. Both strategies was hit hardest in both 2008 and 2016 however, the combined 2 strategy did better of the two.

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MIDF RESEARCH Thursday, 26 October 2017 CONCLUSIONS 1. The combined 2 strategies (Piotroski F Score & ERP5 modified) out performed both the FBMKLCI Index and the single factor Piotroski F Score convincingly. 2. Fund managers can improve their performance by using the Piotroski F Score as a 1 st filter to find financially sound companies on the Bursa and then using ERP5 modified to find on a relative basis stocks that are undervalued as scored by the ERP5 modified 1st quintile. 3. The returns are for 1 year excluding dividends and considered extra returns if they materialize. 4. This quant strategy saves transaction cost with once a year rebalance. Fund managers who wish to be more active can rebalance twice a year with very decent results. Original authors of the system recommend longer term to let the value premium be realized. 5. The results again proved as per our previous report on ERP5 Modified that the strategy advocated by Columbia University Professor Benjamin Graham (known as "the father of value investing" and the "Dean of Wall Street," that “investors should FORM A DIVERSIFIED PORTFOLIO BASED ON A FEW SIMPLE CRITERIA FOCUSING ON THE RESULTS OF THE GROUP INSTEAD OF INDIVIDUAL STOCKS” also applicable in the Malaysian context. 6. Using this quant method to buy stocks with deep intrinsic value on fundamental strength has historically proven to be a superior system than simple stock market averages. 7. Fund Managers should not be afraid to use Piotroski F Score to weed out companies that are not financially sound. They should still be left with a handful of solid stocks with which can be used with another strategy like the ERP5 Modified (last report) as a second filter to also weed out expensive stocks or do more in-depth research on those stocks selected by Piotroski F Score. 8. Therefore, Piotroski’s F Score of segmentation of firms by financial strength continues to look helpful in identifying both potentially attractive stocks as well companies to avoid. Generally, the higher the F-Score, the greater the average portfolio return.

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MIDF RESEARCH Thursday, 26 October 2017 MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad)

DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose.

MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL SELL TRADING SELL

Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. Total return is expected to be 15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow.

SECTOR RECOMMENDATIONS POSITIVE

The sector is expected to outperform the overall market over the next 12 months.

NEUTRAL

The sector is to perform in line with the overall market over the next 12 months.

NEGATIVE

The sector is expected to underperform the overall market over the next 12 months.

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