The Low-High Price Portfolio

Do investors like low share prices?

That is the reason often given for companies having share splits or bonus issues. But surely rational investors understand that price is independent of value?

Apparently not.

An academic paper (Hwang and Lu, 2008) found that in the US equity market share returns are inversely proportional to share price (i.e. the lower the share price the higher the future return). In addition, the paper found that a portfolio that was long of stocks under $5 and short of stocks over $20 and rebalanced annually generated average monthly returns of 0.53%. Lengthening the re-balancing period to two years increased the returns and reduced the costs.

To test whether this applies also to the UK market the performance of two portfolios was compared; the two portfolios were:

  1. Low-price_20: this portfolio buys equal amounts of the 20 lowest priced shares in the FTSE All Share index at close on 31 December, holds the same portfolio for one year, and then re-balances the next 31 December.
  2. High-price_20: as above, but this portfolio buys the 20 highest priced shares.

The following chart plots the out-performance of the Low-price_20 portfolio over High- price_20 for the period 2004-2012. For example, in 2004 the Low-price_20 portfolio increased 62% compared with an increase of 23% for the High- price_20 portfolio giving an out-performance of 39 percentage points.

Out-performance of low-price_20 over high-price_20 [2004-2012]As can be seen, the Low-price_20 portfolio out-performed the High- price_20 portfolio every year except 2008. The average annual return for the Low-price_20 portfolio over the period was 50.3%, and for High-price_20 portfolio 4.9%, giving the former an average annual out-performance of 49.4 percentage points.

And, yes, the data for 2009 are correct – when markets rebound low-priced shares can fly.

Of course, a problem with low-priced shares is that their wide bid-offer spread can increase dealing costs. For example, for the low-price portfolio the average spread for the 20 stocks is 3.6%. However, the low-price portfolio would still easily out-perform the high-price portfolio even with 5% spreads.

Share price frequency distribution

The chart below shows the frequency distribution of share prices in the FTSE All-Share Index.

Distribution frequency of share prices in FTSE All-Share IndexThe chart shows that, for example, there are 64 companies with share prices below £1, 120 companies with share prices £1-2 and 54 companies with share prices £15-100.


Soosung Hwang,Chensheng Lu, Is Share Price Relevant? (2008)

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