Quantitative Value Research: NCAV/MV Factor

Quantitative Value Research: NCAV/MV Factor

November 15, 2014 Research Insights, Value Investing Research
Print Friendly
(Last Updated On: January 18, 2017)

Testing Benjamin Graham’s Net Current Asset Value Strategy in London

Abstract:

It is widely recognized that value strategies – those that invest in stocks with low market values relative to measures of their fundamentals (e.g. low prices relative to earnings, dividends, book assets and cash flows) – tend to show higher returns. In this paper we focus on the early value metric devised and employed by Benjamin Graham – net current asset value to market value (NCAV/MV) – to see if it is still useful in the modern context. Examining stocks listed on the London Stock Exchange for the period 1981 to 2005 we observe that those with an NCAV/MV greater than 1.5 display significantly positive market-adjusted returns (annualized return up to 19.7% per year) over five holding years. We allow for the possibility that the phenomenon being observed is due to the additional return experienced on smaller companies (the “size effect”) and still find an NCAV/MV premium. The profitability of this NCAV/MV strategy in the UK cannot be explained using Capital Asset Pricing Model (CAPM). Further, Fama and French’s three-factor model (FF3M) can not explain the abnormal return of the NCAV/MV strategy. These premiums might be due to irrational pricing.

Alpha Highlight:

Core Idea:

This paper tests a value metric employed by Benjamin Graham – net current asset value to market value (NCAV/MV) – to see if it is still useful in a modern context.

  • Examining stocks listed on London Stock Exchange for the period 1981 to 2005.
  • NCAV/MV Security Selection: Only those stocks with NCAV/MV higher than 1.5 are included in the NCAV/MV portfolios.
  • Results: Firms with an NCAV/MV greater than 1.5 display significantly positive market-adjusted returns (annualized return up to 19.7% per year) over five holding years.
  • Additionally, the differences in returns of the NCAB/MV holdings cannot be explained by the Fama-French three-factor model (which includes size and value factors).
2014-10-03 17_34_11-0Value Reseach Recap.pptx - Microsoft PowerPoint (Product Activation Failed)
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Toby Carlisle, Sunil Mohanty, Jeff Oxman have a paper on the subject in the US market.

 


Note: This site provides no information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.


Join thousands of other readers and subscribe to our blog.


Please remember that past performance is not an indicator of future results. Please read our full disclaimer. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.


Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray received a PhD, and was a finance professor at Drexel University. Dr. Gray’s interest in entrepreneurship and behavioral finance led him to found Alpha Architect. Dr. Gray has published three books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army, QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His numerous published works has been highlighted on CBNC, CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.


  • Steve

    Very cool seeing results from elsewhere.

    Do you know if anyone has ever done a study on NCAV/MV in a relative study? Like the usual deciles / quintiles rather than the absolute 1.5 (2/3rds discount) that Graham required?

    In other words, has it been tested like a price to book, price to earnings ratio as a measure of relative value?

  • I don’t think we’ve ever tested that to be honest. I’ll add to our R&D list…

  • PaulieWalnuts

    I think the study by Carlisle, et. al., did the research in that way. If I remember correctly, the finding was that future returns increase as NCAV/MV increases EXCEPT for the decile where NCAV/MV is the highest. I guess the very highest NCAV/MV stocks must have some blow ups.