Backtesting a Low Price-to-Book Small-Cap Strategy
Summary
The document describes a Chinese equity strategy that screens for stocks trading below book value, excludes flagged or suspended shares and recent listings, then selects the smallest companies by market capitalization. It equally weights ten holdings and rebalances every five trading days. The article also discusses adding a cap on exposure to any one first-level industry as a way to limit concentration, and explains why additional filters may reduce exposure to stocks that drove past returns.
The author reports strong results in a recent backtest and a long-period test beginning in 2007, including substantial cumulative returns alongside a maximum drawdown above fifty percent and a low information ratio. These figures are presented as historical backtest outcomes, not evidence that returns will persist. The article attributes favorable recent performance partly to low-valuation and cyclical sector rebounds, and warns that a market-style shift could hurt the strategy. It provides no independent validation, transaction-cost analysis, or detailed treatment of data quality and backtest bias.
Key ideas
- The strategy screens for price-to-book ratios below one and excludes special-treatment, risk-warning, suspended, and recently listed stocks.
- It selects the smallest eligible companies by market capitalization, holds an equally weighted basket, and rebalances every five trading days.
- An industry exposure cap can reduce concentration, although the reported backtest changed little after adding one.
- The article says added filters may remove stocks that benefit from the prevailing market style.
- Reported returns accompany substantial drawdowns and weak benchmark-relative consistency, so they do not establish future performance.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.