The MicroCapGUTS Index is intended to find quality microcap stocks across the US, Canada and Europe that exhibit the evidence-based GUTS factors, and track their performance as a group over time.
In my own investing strategies, I have devised an approach I refer to as GUTS, which focuses on 4 major areas:
To sum up – GUTS microcaps are those that are
I have found that over time, these factor groups have performed well for microcaps, both historically through backtests, and in actual live “out of sample” performance.
We will use a version of GUTS to form the basis of our MicroCapGUTS index.
The Objective
The MicroCapGUTS Index is intended to find quality microcap stocks across the US, Canada and Europe that exhibit the evidence-based GUTS factors, and track their performance as a group over time.
The objective is to create an index of stocks across different regions which has a return higher than the common benchmarks, with reasonable turnover.
The Approach
The index will be composed of three strategies, combined into one, based on our 3 major regions: US, Canada and Europe.
While all regions will use the GUTS approach, the specific factors may differ slightly to suit the specific market’s nuances or data available.
The strategy will also look at all “liquid” microcaps in each universe, and select the 5-10% highest ranking stocks.
Our full starting universe will be comprised of approximately 2,500 stocks, of which nearly 10% will be our target to select for the index.
Next, all stocks are ranked based on our GUTS criteria.
Each stock is assigned a score on each of the GUTS factors (equally weighted), from 0-100 (100 being the best).
Stocks are then assigned an overall GUTS score (from 0-100). The top ranked stocks from each universe are then purchased, in equal weights.
Each month, the index is rebalanced, and all stocks are re-ranked. Those stocks still within the top number of positions are kept, and those that fall below the minimum rank are sold, with the new higher ranked stocks purchased in their place.
We can now combine the 3 strategies into a single book, to create our full MicroCapGUTS index of approximately 240 stocks.
Weights of each region are based on the selected microcap proportion of each region, roughly US/Canada/Europe: 40/20/40.
The overall strategy has returned 18%+ annualized over the last 10 years in simulation, with underperforming years in 2016 and 2018 compared to the iShares MicroCap ETF (IWC) benchmark. Also notable here is that the strategy has done quite well in the “down” markets, outperforming the benchmark in 93% of “down” quarters.
The strategy has also printed favorable risk characteristics, with favorable Sharpe and Sortino ratios and standard deviations of returns.
Please note: Past performance is no guarantee of future results. This is still a simulation that is backward looking, and there will likely be unseen factors that can impact performance going forward, but this is a good start.
For a full breakdown of the MicroCapGUTS Index and strategy, be sure to check it out here.
Going Forward
We will track the MicroCapGUTS Index on a monthly basis and post the results publicly. We will showcase the performance in its entirety and also looking at each region separately.
On the MicroCapClub community we will also disclose the highest ranked companies per region which could help drive idea generation. Join the community to view.
Like any strategy, some of the details and/or factors may be modified or updated over time. This is usually kept to a minimum to avoid excess turnover.
Feel free to use the index to track against your own performance or holdings.
Disclaimer:
Note that all MicroCapClub indices should not be construed as investment advice or recommendations to buy or sell securities. All indices are meant for tracking and idea generation purposes. Community members and subscribers may hold companies in the index and may buy and sell at any time. Past performance is not an indicator of future results. Please visit our Terms of Use for a more complete disclaimer and discussion of the risks of investing.
MicroCapClub is an exclusive forum for experienced microcap investors focused on microcap companies (sub $500m market cap) trading on United States, Canadian, European, and Australian markets. MicroCapClub was created to be a platform for experienced microcap investors to share and discuss stock ideas. Since 2011, our members have profiled 1200+ microcap companies. Investors can join our community by applying to become a member or subscribing to gain instant view only access. MicroCapClub’s mission is to foster the highest quality microcap investor Community, produce Educational content for investors, and promote better Leadership in the microcap arena. For more information, visit https://microcapclub.com/ and https://microcapclub.com/summit/
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