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Earnings Revision Overlay on Fundamental Factors in Asia


In this research paper, we explore the effectiveness of overlaying earnings revision strategies on traditional fundamental value and quality factors across seven Pan Asian markets—Australia, China, Hong Kong, India, Japan, South Korea, and Taiwan—between March 31, 2006, and March 31, 2018.


  • The earnings revision-screened factor portfolios outperformed their respective comparable factor portfolios across the majority of Pan Asian markets for the value and quality factors.
  • Our screening approach did not introduce a large increase in portfolio turnover or strong sector or size biases to the fundamental factor portfolios historically.
  • Among various Asian markets, the earnings revision overlay generated the most significant excess return in Australia and Hong Kong for a majority of fundamental factors.

Exhibit 1: Information Ratios of EPS Diffusion-Screened Factor Portfolios Vis-à-Vis Their Respective Comparable Factor Portfolios

Information Ratios of EPS Diffusion-Screened Factor Portfolios Vis-à-Vis Their Respective Comparable Factor Portfolios

All portfolios shown are hypothetical and back-tested.
Source: S&P Dow Jones Indices LLC, Factset, and Thomson Reuters.  Performance based on monthly local currency total return from March 31, 2006, to March 31, 2018.  Earnings diffusion was computed as the number of upward revisions minus the number of downward revisions of EPS estimates divided by the total number of EPS estimates.  Past performance does not guarantee future results.  Chart is provided for illustrative purposes and reflects hypothetical historical performance.  Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.


In our previous research paper “Do Earnings Revisions Matter in Asia?”, we concluded that stock prices tended to move in the same direction as their earnings revisions in the majority of Pan Asian markets, and the earnings revision strategies delivered excess returns in a majority of the markets.  Due to the high portfolio turnover of this strategy, using earnings revision as an overlay to fundamental factors may be more practical.

The goal of this research is to evaluate the effectiveness of earnings revision strategies over the fundamental factor portfolios.  We overlaid two earnings revision screens (EPS change and EPS diffusion) on the fundamental value and quality factor portfolios, respectively.  Specifically, we examined if the earnings revision screens were historically effective in generating return alpha or reducing the risk of the factor portfolios by filtering out the stocks with relatively poor earnings revisions from the factor portfolios.[1]

[1]   See Exhibits 21, 22, 23, and 24 in the Appendix for the total return of the comparable factor portfolios over the entire back-tested period.

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