The early editions of James O’Shaughnessy’s bible What Works on Wall Street identified two combination strategies that were so good that mutual funds were formed to implement the strategies. Cornerstone Value was a large cap dividend strategy, while Cornerstone Growth combined value with relative strength. The funds have been around since 1996 or so. CXO Advisory poses the question:
Has 14 years of out-of-sample performance of these two mutual funds confirmed the motivating backtests?
HFCVX [Hennessy Cornerstone Value] underperforms both its benchmark Russell 1000 Value Index and the S&P 500 Index. The fund underperforms the S&P 500 Index by about 0.5% per year, compared to the backtested average annual outperformance of about 7%. Also, its standard deviation of annual returns (20.1%) is higher than that for the benchmark Russell 1000 Value Index (18.7%). Backtested outperformance has not persisted over a 14-year out-of-sample implementation.
HFCGX [Hennessy Cornerstone Growth] outperforms both its benchmark Russell 2000 Index and the S&P 500 Index. The fund outperforms the S&P 500 Index by about 2.5% per year, compared to the backtested average annual outperformance of about 10%. Its standard deviation of annual returns (21.2%) is about the same as that for the benchmark Russell 2000 Index (21.1%). Backtested outperformance has persisted at a subdued level over a 14-year out-of-sample implementation.
Source: CXO Advisory
In other words, the dividend strategy has not been able to beat the market over the last 14 years, while the relative strength strategy has outperformed in real life. This mirrors CXO’s findings earlier. I might note that the outperformance of the Cornerstone Growth strategy comes despite the Q3-Q4 2008 – Q1-Q2 2009 performance of relative strength, which was a big historical outlier. The underperformance of relative strength was epic during that brief period—and Cornerstone Growth outperformed anyway. I would further note that the 2.5% annual outperformance is after fees.
Evidence suggests that relative strength is a strategy worth implementing.