Can a typical investor exploit the high returns reported for Piotroski’s FSCORE strategy as applied to U.S. stocks? In their October 2015 paper entitled “The Piotroski F-Score: A Fundamental Value Strategy Revisited from an Investor’s Perspective”, Christopher Krauss, Tom Kruger and Daniel Beerstecher examine whether individual investors can exploit the American Association of Individual Investors’ (AAII) interpretation of this strategy (24% gross annual return over the last decade). They consider equal-weighted and value-weighted long-only (FSCORE 8 and 9) and long-short (short the S&P 500 Index) versions of the strategy, with monthly or weekly rebalancing. They first calculate gross performance and then progressively add realistic obstacles to/costs of trading. They assume average round-trip trading frictions of 0.2% for broker commissions plus 0.5% for bid-ask spreads (but no costs for shorting the S&P 500 Index). Using AAII’s FSCORE screen to generate monthly and weekly portfolios of U.S. stocks via AAII’s Stock Investor Pro platform matched to total stock returns from Datastream during January 2005 through April 2015, they find that:
- For monthly rebalancing over the entire sample period:
- The equal-weighted long-only (long-short) strategy generates gross annualized return 30.9% (22.3%), gross annualized Sharpe ratio 0.87 (0.72) and maximum drawdown -63% (-39%). Comparable performance data for the S&P 500 Index are 7.8%, 0.44 and -51%, respectively.
- When adjusted for three-factor (market, size, book-to-market), four-factor (adding momentum) and five-factor (adding profitability and investment instead of momentum) models of stock returns, the average gross monthly return of 2.71% for the equal-weighted long-only strategy translates to gross monthly alphas of 1.94% to 2.53%.
- For the equal-weighted long-only strategy:
- Excluding stocks with daily trading volumes less than $1 million reduces average gross monthly return from 2.71% to 1.08% (and reduces average portfolio size from nine to only three stocks).
- Further including a delay of one trading day between screening and execution modestly increases average gross monthly return from 1.08% to 1.34% (but decreases average return for lower trading volume thresholds).
- Applying 0.7% round trip trading frictions reduces average gross monthly return to 0.64% (about 7.7% annualized).
- For weekly rebalancing over the entire sample period:
- The equal-weighted long-only (long-short) strategy generates gross annualized return 65.4% (53.9%), gross annualized Sharpe ratio 1.81 (1.82) and maximum drawdown -53% (-25%).
- When adjusted for three-factor, four-factor and five-factor models of stock returns, the average gross weekly return of 1.09% for the equal-weighted long-only strategy translates to gross weekly alphas of 0.89% to 1.23%.
- For the equal-weighted long-only strategy:
- Excluding stocks with daily trading volumes less than $1 million reduces average gross weekly return from 1.09% to 0.54% (and again reduces average portfolio size from nine to only three stocks).
- Further including a delay of one trading day between screening and execution lowers average gross weekly return from 0.54% to 0.48%.
- Applying 0.7% round trip trading frictions makes the weekly strategy unprofitable.
In summary, evidence indicates that Piotroski’s FSCORE strategy as interpreted by AAII and implemented with realistic constraints/costs is largely impractical for individual investors.
Cautions regarding findings include:
- As shown in the paper, relaxing trading volume constraints to volumes below $1 million improves performance. However, impact of trading on price (elevated trading frictions) may offset the improvement.
- The driver of performance differences between monthly and weekly rebalancing is likely a return reversal effect (from the initial book-to-market screen) and not a value effect.
- There may be approaches with infrequent rebalancing that capture FSCORE raw returns more efficiently than found in the paper.
See also “Classic Paper: Piotroski’s Efficient Value Investing”, “Revisiting Performance of Piotroski’s FSCORE” and “AAII Stock Screens”.
