Sentiment Strategy

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Introduction to the investment strategy

This strategy is built around the FF Sentiment Rank for industries and stocks. The rationale behind the strategy is that positive/negative sentiment changes, like earnings estimates revisions and analyst's ratings changes, are followed by price increases/decreases.

Many studies have shown that sentiment and momentum investing is a long-term profitable investment strategy. Check the Literature List for further reading. These studies have, in a multitude of cases, focused on one or a few momentum factors, such as price changes or earnings estimate revisions. The FF Sentiment Rank on the other hand includes eight sentiment factors for increased sustainability and profitability.

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 top 10 sentiment industries are established. This is done by aggregating the individual stock scores in all of the industries that our investment universe is divided into. This step is taken in order to achieve a good level of diversification. We do not want to concentrate the stock positions to merely a few industries.

• From the top industries, the two stocks with the highest sentiment scores are selected. This means that the portfolio consists of 20 'strong-sentiment' stocks from the 10 strongest industries.

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 - 20 stocks are selected from 10 industries. The number of stocks selected decreases the market risk and the industry selection reduces the risk of being exposed to merely a few industries.

Results - what to expect?

This is an aggressive strategy with an expected long-term return of 15% - 21% 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.

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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