Rank Breakout Strategy

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Introduction to the investment strategy

This strategy is built around changes in the FF Sentiment Ranks for stocks. The rationale behind the strategy is that significant positive/negative FF Stock Rank changes are followed by price increases/decreases. In a short period of time going from a 'Neutral' ranking to a 'Strong Buy' is very positive for a stock's subsequent price path.

If you are looking for an aggressive strategy with significant upside potential, this strategy is for you.

Portfolio composition - how are the positions determined?

The investment portfolio consists in this strategy of only long stock positions. The stocks selected for inclusion in the portfolio are determined in the following way:

• The stocks selected are those whose FF Sentiment Rank has changed to a 'Strong Buy' from at least a 'Neutral', from at least a #3 rank to a #1, during the last two weeks.

• The FF Quality Rank should stand at a 'Neutral', a #3 rank, or better for inclusion.

• The number of stocks selected ranges between 10 and 50 over time.

Entry/exit - when are the positions changed?

Portfolio updates are determined on a weekly basis, after the weekly update of FF Stock Rank. No new positions are established and no stocks are dropped from the portfolio between the portfolio updates.

Exposure

100% long, i.e. no short positions and no margin trading.

Risk Management

The risk of loss is handled by means of diversification. Even if the number of stocks determined for inclusion in the portfolio is limited, the position sizing of the individual positions is done on the basis of a pre-determined minimum number of positions in the portfolio.

Results - what to expect?

This is an aggressive strategy with an expected long-term return of 16% - 22% per year, a slightly lower annual standard deviation and a Sharpe Ratio of 0.8 - 1.2.

Risk - which types of market environments are detrimental to the strategy?

The strategy experiences hardship in the short term when the sentiment turns around for one or more industries or a number of stocks. This typically occurs after significant run-ups in price. There is no explicit mechanism for industry diversification, which means that the stocks from time to time in the portfolio could be concentrated to a limited number of industries.

Also, a situation of a general market down-turn is negative to the strategy as there is no hedging (no short positions) or protection (no put options) and the correlation with the general market can be expected to be positive on the up-side as well as on the down-side.

Model portfolio size

The position sizing is based on a model portfolio of US$100,000. If you are running a larger/smaller portfolio you need to adjust the position sizes in relation to the model portfolio. Depending on the portfolio size, there could be situations when some stocks are traded in odd-lots.

Updates

You will by e-mail receive the transactions that are to be executed as a consequence of the latest portfolio update. Current positions are found here on the web site.

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