# ASX20 XJO Value Composite Index



## Macros (16 October 2011)

I've updated my ASX proxy analysis and thought I'd start a thread on the topic.

I love this sort of analysis, so perhaps it is useful for others too and hence the reason for my sharing.

Essentially it is a composite value analysis of the companies that make up the ASX20. Given the respective market cap of each company within, I think that it provides a good proxy for the XJO index. I may be able to extend it as far as the full XJO in the future, however 20 or so companies seems to be close enough to a limit for now. There are some issues such as debt levels, as there are a number of banks included. The valuations are a modification of the formula used by Roger Montgomery. 

I don't use this information to trade on, however I find it very useful in putting the market in perspective and to help inform other investment decisions.

I'm happy to have feedback if there are any good suggestions for improvement. If there is sufficient interest, it is my intention to provide semi regular updates (monthly or quarterly).

I've attached the PDF 
	

		
			
		

		
	

View attachment XJO (ASX20 PROXY) AGGREGATE VALUE COMPOSITE INDEX.pdf

I'll be posting updates at http://macrovalueinvestment.blogspot.com/


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## Macros (6 January 2012)

I haven't had much interest in this sort of analysis, but if anyone is interested, here is the latest update.




I've also now tracked my economic indicator for fair value and the results are very interesting for me. More information is provided in the link above.


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## Macros (5 June 2013)

I've found an interest in continuing my market analysis.

I think the forecast I made in 2012 was pretty good.

Here is a summary:


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## Macros (5 June 2013)

Whilst I still need to do more work on it, here is an update:


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## Macros (5 June 2013)

I'll note that it now incorporates the top 30 ASX stocks by market capitalisation - not ASX20. I may also increase the number to 50 if it improves accuracy.


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## craft (5 June 2013)

Macros said:


> Whilst I still need to do more work on it, here is an update:
> 
> View attachment 52618




Hi Macro’s

Just letting you know somebody is reading your posts.

Very nice presentation on the charts – are they yours?  

Where do you source your data from? 

You interested in talking about your valuation formula – The RM formula needs quite a few tweaks to get it to resemble reality for most companies.

Cheers


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## Macros (5 June 2013)

Hi Craft,

Thanks for reading and the compliment on the charts 

They are mine - all done in Excel. Data is scraping from all publicly available sources (MSN, Yahoo, Reuters, Google, Mnstar).

Valuation formula. The RM formula gave me inspiration, but I think it is similar to a PE ratio - it is a simple rule and doesn't give you the full picture - as you say it frequently does not represent reality. The formula I used over a year ago was different to the RM one and now the differences are even greater. 

I have a debt weighting component to the valuation which means that the higher the debt level, the higher the required return - this is calculated by a method of effective interest cost. This seems to mitigate over-valuation of companies that boost their ROE by consistent debt accumulation.

I also have a number of modifications to earnings with the purpose of achieving a more stable picture. For example, excluding unusual earnings and other one-off's which may inaccurately boost sustainable earnings. In times where earnings have dipped temporarily, estimated value is anchored somewhat to existing values and book value. In this case I include an allowance for expected realisable assets.

The current value is based on forward earnings expectations. This means that it is changing. I believe that this fits in with what occurs in the marketplace because the market, in general, is looking ahead to discount some future earnings (whether right or wrong). The forward earnings figure that I use is a combination of analyst expectations, earnings momentum and revenue forecast (feeding through to earnings). The adjustments I make seem to be sufficient to identify periods of over-estimation by analysts. For example, there is a substantial divergence between analyst forecasts and the figures I use when it comes to the companies in the DAX (over-optimistic expectations). For this reason I think the German market currently has much more downside potential compared to US and Aussie markets.

The forward dividend payout is based on current trend, earnings rate of change and any apparent short-term changes to dividend payment rates. I also estimate changes to shareholders equity and share issuance.

I still need to make further improvements, but I'm happy at where it stands at the moment. I think on a market-wide basis, there is a greater tolerance for error compared to an individual stock. I use the one formula for all stocks - and this includes international stocks too.


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## craft (5 June 2013)

Macros said:


> Hi Craft,
> 
> The current value is based on forward earnings expectations. This means that it is changing. I believe that this fits in with what occurs in the marketplace because the market, in general, is looking ahead to discount some future earnings (whether right or wrong). The forward earnings figure that I use is a combination of analyst expectations, earnings momentum and revenue forecast (feeding through to earnings). The adjustments I make seem to be sufficient to identify periods of over-estimation by analysts.




Hi Macro

I have a somewhat different perspective than this.

A valuation should only need change if new information comes to hand that tells you one of your assumptions about the future was wrong. Constant changing of intrinsic value doesn’t make much sense to me.

If you look backwards using actual cash flows the valuation line would be straight with its height and slope dictated by your required return. Getting the long term assumptions right to place this line in the correct place is the art of valuation.

However that being said. Using a static valuation method and regularly updating it for changes in earnings perceptions does produce an indicator of earnings momentum – that is more what it looks to me like you are doing.  My personal  is that earnings momentum is best traded by price at least for individual companies – too much lag in information release unless you are truly expert in an industry/company.

Aggregating the individual stocks for the indexes isn’t probably being done by many so has the potential for more unique insight– are you looking to trade the indexes based on this?

Hope anything I written above is not taken negatively – It would just reflect a different time frame perspective or me misinterpreting something I suspect. Respect what you have put on this tread to date and will follow with interest. 

Cheers

ps. Wish I had your excel skills.


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## Macros (5 June 2013)

craft said:


> Hi Macro
> 
> I have a somewhat different perspective than this.
> 
> ...





Craft,

I guess it all comes down to the timeframe and purpose.

If you were investing in a company with a long timeframe then you would be seeking the greatest amount of stability. In this case, the movements in the earnings between now and the next couple of years shouldn't matter as much. Is the purpose to achieve long term capital appreciation/preservation or income growth? These sorts of questions impact on the usefulness of different types of information.

The idea of changing valuation makes perfect sense to me. The world is in a state of flux. Some companies emerge and some decline. A long term position requires identification of a trend and circumstances to allow for the trend to continue. Changes in circumstances may result in a different perspective.

Example:

*Ramsay Health*



*Woolworths*



Ramsay health has had much more consistent increases in estimated value compared to Woolworths. Both are successful companies and the share price has reflected this fact. If I had to choose, perhaps I may have decided to allocate a greater position in Woolworths prior to 2008 and a greater position in Ramsay from 2009 onwards. 

This sort of analysis, to me, is useful to anchor investment decisions. If used in aggregate to approximate market value in either expansion, decline or stagnation, it could help decisions to increase or decrease overall exposure.

I do this sort of analysis simply because I enjoy it - I do it for the process and challenge. I haven't been trading index positions based on this analysis (although by 'trading' this is would be a 3-12 months position), but I certainly could and would have - except that I've had challenging personal circumstances that first need to be overcome.

There is no negativity at all - I appreciate any response. There are many ways to look at the same thing and there is more than one solution.

I'm a big fan of excel


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## Gringotts Bank (16 September 2013)

Anyone know where I can get a list of stocks due to be added to or removed from the various ASX indices?  Thanks.


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## RazzaDazzla (16 September 2013)

Gringotts Bank said:


> Anyone know where I can get a list of stocks due to be added to or removed from the various ASX indices?  Thanks.




Long the ones being added, short the ones being removed?


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## Gringotts Bank (16 September 2013)

RazzaDazzla said:


> Long the ones being added, short the ones being removed?




Yeh.  I'm sure it's not a new idea.  I'd still like to look at it.


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## skyQuake (16 September 2013)

Gringotts Bank said:


> Yeh.  I'm sure it's not a new idea.  I'd still like to look at it.




The S&P rebals are announced before market open on the 6th Sept. So you can look for it under say CMW or FGE (additions)

Here's a link from the S&P indices website:
https://www.spice-indices.com/idpfi...2013.09.06-quarta-200.pdf?force_download=true

No idea how to get the rebals data for asx 100 without iress or bloomberg though.

Also note FTSE indices and Market Vector and a whole lot of other stuff rebal on the same day.


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## Gringotts Bank (16 September 2013)

skyQuake said:


> The S&P rebals are announced before market open on the 6th Sept. So you can look for it under say CMW or FGE (additions)
> 
> Here's a link from the S&P indices website:
> https://www.spice-indices.com/idpfi...2013.09.06-quarta-200.pdf?force_download=true
> ...




Thanks a lot skyQ.

I can't imagine there's any edge since obvious edges get killed by traders.  Or is there?


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## skyQuake (16 September 2013)

Gringotts Bank said:


> Thanks a lot skyQ.
> 
> I can't imagine there's any edge since obvious edges get killed by traders.  Or is there?




They were good for a while, but personally don't like S&P rebals.
1. Its too well known and too well frontrun
2. You'll never know if its an overcrowded trade (and get killed on it) or very uncrowded (and make heaps)
...or if the big money has already pre-traded.
Still good to keep an eye on it anyhow, in case someone needs to do a lot of volume on the close in a hurry.


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## skc (16 September 2013)

skyQuake said:


> They were good for a while, but personally don't like S&P rebals.
> 1. Its too well known and too well frontrun
> 2. You'll never know if its an overcrowded trade (and get killed on it) or very uncrowded (and make heaps)
> ...or if the big money has already pre-traded.
> Still good to keep an eye on it anyhow, in case someone needs to do a lot of volume on the close in a hurry.




I tried this for a number of quarters and the results were patchy at best. Sometimes you get big moves in the right direction only to be smacked down on the closing match. Or you get moves in the opposite direction of the addition/deletion. Then every now and then some random stock that has no relation to rebal spikes up/down on close.

It's mess that I can't get any edge out of, unless it spike when I am holding something as a leg for a pair.


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