Most earnings-based valuation models imply that equity returns should be a function of changes in expected earnings, earnings growth rate and its rate of return.
As compared to research on the first 2 elements, empirical work on the earnings rate of return, often defined as earnings acceleration or deceleration, is relatively limited and less understood.
In this webinar, Richard Adams, Investment Director of American Century Investments (ACI), shared the results of ACI’s global study, which investigated the effectiveness of earnings acceleration on significant and durable excess returns across market cycles, sectors and major regions.
In addition, Richard also examined whether an earnings acceleration portfolio may provide diversification to a broader equity portfolio with more traditional style Fama-French factor exposures.
Transcript (with timings)
3:15 – Background to ACI’s global study
4:07 – What does the term ‘earnings acceleration’ actually mean?
5:43 – Linking earnings acceleration to global equity stock price outperformance
6:44 – Does this theory apply globally or are there regional differences?
7:43 – Sectoral and cyclical variances
10:28 – Which sectors have shown more stability?
11:03 – Role of earnings acceleration in the equity portfolio
15:35 – Earnings estimates and assumptions underpinning the model
18:42 – Hypothesis for EPS acceleration
19:22 – Are linear assumptions the best way to think about future activity and earnings?
20:22 – How do you treat a company that has negative or inconsequential earnings?
22:38 – Is revenue and cashflow linked to earnings acceleration?
24:35 – Surprises in the sector results
26:33 – Correlation to momentum investing?
28:34 – Financial and industrials are traditionally value sectors, but the study is showing the correlation as fairly weak
29:53 – How would this strategy fit in an investment portfolio alongside other factors (value, quality growth, etc)?
31:58 – Does this strategy work in the Australian market?
33:43 – Performance in times of market crisis
39:22 – When and how quickly do you make the decision to sell a company?
42:16 – Should you ever invest in a company that isn’t accelerating?
Presenter: Richard Adams, Vice President & Senior Investment Director, American Century Investments
Host: Teik H. Tan, Executive Director, Investment Innovation Institute [i3]