Combining Profit Growth, Low Turnover, and Small Size in an Equity Factor

Summary

This note proposes an equity factor that adds cross-sectional percentile ranks for year-over-year growth in recent net profit, the negative of a ten-period turnover sum, and the negative of total market capitalization. The intended interpretation is that higher scores favor long positions, while lower scores may be used for short positions. The author reports that factor returns rise across score buckets and describes the relationship as strongly monotonic.

For a long-short portfolio with turnover above 10%, the note reports an annualized return of 88.24%, a Sharpe ratio of 3.2, and a maximum drawdown of 10.56%. These are the document's reported figures, not independently verified results. It does not specify the sample period, universe, rebalancing details, transaction costs, or controls for survivorship and other biases. Those omissions make it difficult to assess whether the factor's reported performance would persist out of sample or after implementation costs.

Key ideas

• The proposed factor combines profit growth, lower recent turnover, and smaller market capitalization using percentile ranks.
• Higher factor scores are proposed for long selection, while lower scores are proposed for short selection.
• The note reports a monotonic pattern across factor score buckets.
• It reports long-short performance figures but omits the sample period and important testing details.
• Transaction costs and out-of-sample robustness are not discussed.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.