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Do fundamental accounting-based scoring models like the FSCORE and GSCORE predict winners and losers for non-U.S. stocks? A new study tests these models on Australian stocks and finds they perform well.
Sean Foley PhD candidate, U. Sydney CMCRC ResearcherAngelo Aspiris CMCRC Research Leader Keywords: Investment management, predictive modelling
Fundamental investment managers in the U.S. are well versed in using account- ing based research for picking stocks. In the U.S. market, fundamental-based mar- ket strategies like Piotroski’s FSCORE and Mohanram’s GSCORE are used to identify the state of a firm’s health, profitability and efficiency. The signals that are inferred from this classification system are then used to form profitable trading strategies. In their 2013 paper titled “Fundamental Based Market Strategies”, Dr Angelo Aspris (research leader), Sean Foley, (researcher), Nigel Finch, and Zachary Meyer (research associates) test fundamental strategies on the Australian Market and provide evidence that these models perform well on Australian stocks. The research considers three scoring models: FSCORE which aims to identify and rank the best companies amongst a basket of value stocks (high book to market) by using nine accounting based stock selection criteria; GSCORE which ranks the best growth stocks (low book to market value) by using eight growth criteria; and a newly developed RM-Index which combines a valuation assessment with measures of financial performance, creditworthiness, liquidity and operational efficiency. The RM-Index ranking was developed by a boutique Australian fund manager that engages in value-based fundamental investing. Using publically available data the models are tested on the top 300 ASX listed companies over an eleven year period from 2000 to 2010. Stocks were annually rescored at the beginning of November for the S&P/ASX 300. Using this method, the authors show annualised excess returns of 43.1% for the FSCORE, 20.1% for the GSCORE, and 14.3% for the RM-Index. These returns provide evidence that fundamental accounting-based scoring models are able to pro- duce superior investment returns on the Australian market over the medium term. It was also noted that during the difficult GFC years of 2008 to 2010 these models produced positive returns that significantly outperformed the market index. The robustness of these results is tested across a range of liquidity and transac- tion cost considerations. The authors show that the returns generated by the mod- els are not driven by typical risk-return considerations, giving credence to the argument that fundamental information contained in accounting statements may not be accurately priced into a company’s stock price.
Author(s): Sean Foley, Angelo Aspris
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