Goldman Sachs apparently knows the key to beating the market, but the bank is only telling its elite club.
The bank has created 39 portfolios exclusively for its clients, and 34 of them are outperforming the market this year while three are posting a 11 percent gain, more than doubling the S&P 500‘s year-to-date return. The three winning baskets are “high revenue growth,” “high Sharpe ratio,” and “dual beta,” according to a broad note to clients on Monday explaining the portfolios’ constructions and growth outlooks.
Goldman has been handpicking stocks based on various proprietary themes and sectors for a decade, but these portfolios are only made available for its clients to trade on the Bloomberg terminal. The bank treats the members of the baskets carefully and doesn’t always disclose all the member stocks, even in its daily and weekly notes.
Along with good track records this month, the baskets also have solid long term track records. However, the bank doesn’t suggest buying and holding the various baskets all at the same time. They recommend certain baskets at certain times based on the type of market environment.
For example, Goldman warned clients at the end of last week about companies with big revenues from China, and specifically Nvidia, days before the chipmaker released surprise disclosure on China slowdown and blew up its stock. In the note, Goldman told clients to avoid its international sales basket and recommended its domestic sales basket instead for investors wanting to hedge against international risks.
One of the best-performing baskets this year consists of 50 companies in the S&P 500 that have the highest expected sales growth based on the Street’s consensus. The equal-weighted portfolio has returned 10.7 percent so far in January and 143.4 percent since its inception in May 2011, versus the S&P 500’s 5.4 percent and 137.3 percent respectively.
“This basket focuses on companies positioned to use top-line revenue generation instead of margins to drive bottom-line earnings,” Goldman’s chief U.S. equity strategist David Kostin said in the note.
It’s actually no surprise that this portfolio has performed well this year as fewer and fewer companies are able to continue drive organic sales growth on the heels of a global economic slowdown. Many companies have voiced concerns this earnings season about the impact from the slowing demand and weaker consumer confidence.
Another winning factor this year is the Sharpe ratio, a measure of a stock’s performance relative to its volatility. Goldman uses consensus price targets and options six-month implied volatility to measure Sharpe ratios.
“The inclusion of a risk metric has led to consistent outperformance on an absolute basis. The median stock in our basket offers almost double the expected return than the median S&P 500 stock with similar risk,” Kostin said.
The portfolio has returned 11.5 percent year-to date and a whopping 238.8 percent since its inception in December 2009. Stocks selected in this basket include PVH, Conagra Brands, Western Digital and Assurant.
— With reporting by Michael Bloom