Unlocking Volatility Drag: The Equity Summary Score Advantage

The Hidden Cost of Volatility Drag

That said, the Equity Summary Score methodology provides a consolidated view of the ratings from a number of independent research providers on Fidelity.com. Historically, the maximum number of providers has been between 10 and 12. However, some stocks are not rated by all research providers.

Why Most Investors Miss This Pattern

Since the model uses a number of ratings to arrive at an Equity Summary Score, only stocks that have four or more firms rating them have an Equity Summary Score. It uses the providers’ relative, historical, recommendation performance along with other factors to give you an aggregate, historical accuracy‐weighted indication of the independent research firms’ stock sentiment.

A 10-Year Backtest Reveals...

What's interesting is how this methodology can be used as a benchmark for investors. By understanding the Equity Summary Score methodology provided by StarMine, a division of Thomson Reuters focused primarily on building quantitative factor models for institutional investors, we can gain insight into the investment process.

What the Data Actually Shows

On the flip side, it's essential to consider the limitations of this methodology. For example, smaller cap stocks are then slotted into this distribution without a force ranking, and may not exhibit the same balanced distribution. This means that smaller cap stocks may receive less weight in the Equity Summary Score.

Three Scenarios to Consider

Three scenarios come to mind when considering the Equity Summary Score methodology. First, it could be used as a tool for portfolio rebalancing. Second, it could provide insight into sector-specific trends. Third, it could serve as a benchmark for evaluating investment strategies.

The Impact on Portfolio Management

The Equity Summary Score methodology can also have a significant impact on portfolio management. By providing a consistent ratings distribution, this model can help investors evaluate the largest stocks (in terms of capitalization), which typically make up the majority of Fidelity’s investors’ portfolios. This means that there will be a uniform distribution of scores provided by the model, thereby assisting investors in evaluating the largest stocks.

How to Use Equity Summary Scores

To use Equity Summary Scores effectively, it's essential to understand how they are calculated. The StarMine model takes the multiple standardized ratings of the research providers and creates a single Equity Summary Score/Sentiment using the following steps:

Step 1: Normalize – Look at the research providers’ buy and sell ratings distributions to understand which ratings are scarce and therefore more important.

The distribution of ratings from each of the independent research firms are normalized to make them more comparable with each other. For example, some research providers may issue a large number of buy recommendations and few sell recommendations, or vice versa.

Step 2: Weight – Look at the 24-month relative firm/sector ratings accuracy and use that information to determine which firms’ ratings have the most weight in the aggregated Equity Summary Score.

For over five years on Fidelity.com, StarMine has run its sophisticated scoring system to facilitate a fair comparison of research provider recommendation performance across widely disparate industries and market conditions. The StarMine Relative Accuracy Score for each research provider uses the past performance of the provider’s individual stock recommendations with that of its peers in each sector to calculate a statistical aggregation ranging from 1 to 100.

Step 3: Calculate – The normalized analysts’ recommendations and the accuracy weightings are combined to create a single score.

For the largest 1,500 stocks by market capitalization, these scores are then forcibly ranked against all the other scores to create a standardized Equity Summary Score on a scale of 0.1 to 10.0 for the 1,500 stocks. This means that there will be a uniform distribution of scores provided by the model thereby assisting investors in evaluating the largest stocks (in terms of capitalization), which typically make up the majority of Fidelity’s investors’ portfolios.

Conclusion

In conclusion, the Equity Summary Score methodology provides a unique perspective on the stock market. By analyzing the ratings from multiple independent research providers, we can gain insight into the investment process and make more informed decisions about our investments.