Harbour Asset Management has formally included a new stock quality ranking system into its investment process.
Andrew Bascand, Harbour chief, said the quality overlay – based on a nine-point scoring system developed in 2002 by Stanford University professor, Joseph Piotroski – would feed in to the manager’s investment decisions along with traditional analyst research and consideration of environmental, social and governance (ESG) factors.
As reported here this March, Harbour investment analyst, Susanna Lee, had shown a Piotroski Q score process added about 2 per cent to a NZ shares portfolio back-tested to 2002.
The Piotroski method scores companies either zero or one across nine metrics – including net income, operating cash flow and gross margin – to establish a ranking (with nine representing the highest quality).
Bascand told an adviser roadshow in Wellington late last month, the manager had since developed a modified version of the Piotroski measure – dubbed the ‘Harbour Q Score’ – now incorporated into its investment process.
He said back-testing indicated that by excluding NZ companies ranked zero to four (out of a possible nine) on the Harbour Q scale provided “real uplift” to performance.
According to Bascand, the Q Score also proved its value in Harbour’s real portfolios.
“About six months ago Tower cropped up as a possible buy [based on traditional measures] but Susanna said not to go near it as its quality had fallen off the cliff,” he said, prior to a performance and share price slump for the insurer. “That was the first time we used the Q Score.”
Bascand said the Q Score provided additional information to ESG factors, which Harbour has included in its stock-ranking systems since 2012.
“ESG is embedded in how we think about equities,” he said. “We now have 81 ESG questions we ask companies – and that number is growing.”
While the field covers a wide variety of factors – Harbour tilts its measure towards the governance angle – Bascand said there tends to be a correlation between high ESG rankings and corporate performance over the following 12 months.
He said research by Harbour has shown mixed results for the correlation between ESG and the Q Score over different time periods.
“The Q Score and ESG may be related but we think they are independent factors that can be used in the investment process,” Bascand said.