O'SHAUGHNESSY : |Back to his Strategies |Cornerstone Value Blog|

This strategy started off by once a year creating a special "Market Leaders" Universe of stocks that exhibited the following characteristics:

  1. Market Capitalisation greater than the average of the market
  2. Shares outstanding greater than the market average
  3. Cash flow per share greater than the market average
  4. Sales (Turnover or revenue) 50% greater than the market average.
The above initial criteria eliminated about 95% of the entire US market. The strategy then goes on to rank this Market Leaders Universe by Shareholder Yield and buy the top 50 ranked stocksThe process is repeated and the portfolio rebalanced every year. Since the JSE is only 400 shares versus the U.S.'s 7,000 we will focus on the top 10 shares only.

To create the Shareholder Yield you take the Dividend yield and add it to any net share buyback activity to get all funds distributed back to shareholders. There are times when buybacks are all the rage and times when dividend yields are - with Shareholder Yield you capture them both. O' Shaughnessy used the cash flow-per-share test to overcome possible problems with a share not being able to payout dividends.

A $10,000 investment in this strategy made on December 31 1952 would have grown to $24,071,481 at the end of 2003, a compound annual return of 16.49% The standard deviation of this strategy was 17.47% and a Sharpe Ratio 0f 0.71.

Downside risk was a lowly 4%. The worst 1-year drop of the portfolio during this period was 12.9% whereas the maximum decline at any time was 29.05%. The strategy never had a 5 year period where it lost money. It's 1 year base rate was 67% (beating the S&P 34 years out of 51) and its rolling 5-year base rate was 85%.

After publishing his research in 1996, O' Shaughnessy began using this strategy to run the Royal Bank of Scotland O'Shaughnessy US Value, which was awarded 5 stars by Morningstar and ranked in the 1st quartile of performance over the previous 1,3 and 5 year periods. You can track the performance of this portfolio at the CornerStone Value strategy blog or the SCOREBOARD main menu.

The strategy is similar to the famous "Dogs of the Dow" strategy that invests only in the highest dividend yielding stocks, except in this case we look at a universe of market leading shares and incorporate share buybacks into the dividend yield computation.

O' Shaughnessy's original criteria proved highly restrictive on the JSE, producing only about 5 shares. This is due to the small size of our market (400 shares versus the U.S.'s 7,000 shares), and our market being dominated by a few very large-cap shares that drive the averages up. So we had to make some adaptations, namely to remove very large issues from the average calculations. 

Even after removing some large shares from the average calculations, we were left with 20 shares. We then sorted this universe by shareholder yield and selected the top 5-6 shares for the O'Shaughnessy Cornerstone Value model portfolio

We have not scheduled the rather complex JSE backtests required for this strategy yet but we have been running quarterly model portfolios for our subscribers since March 2009. They are all performing exceptionally well in addition to out-performing the ALSH as can be seen below, and are extracting very respectable dividend payments (income) given the current economic climate.

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