G-Score Research and Development Intensity Backtest Part 5

Last week I examined Mohanram G-Score Sales Growth 5-Year Variance, in Part 5 I’m going to backtest the G6 factor, research and development (R&D) intesity. This is simply annual R&D expenditures divided by prior period total assets. Then R&D intensity is ranked for each company within it industry. The idea here is that growth companies that spend more of their assets on R&D potentially grow faster. Let’s first review my backtest rules and then see how this Mohanram G6 factor performs.

Here’s the backtest rules I ran on Portfolio123 to test R&D Intensity on stock performance:

Notice that I removed companies missing annual R&D expenditures or had missing values for that variable. I only did that for this G6 backtest because the large number of missing values and zeroes would make it hard to look at performance quintiles. 

Summary of Results for G6: R&D Intensity

* Average excess returns were analyzed starting in each month with 12-month holding periods (230 sample periods). This avoids the potential for seasonal reporting bias.

The results for the Mohanram G6 R&D intensity factor do not show a strong linear relationship. In fact, it looks like companies with average R&D expenditures in their sector outperform the average returns of stocks from the highest quintile of companies by R&D Intensity.

Mohanram G-Score: G6 Returns (2002 – 2020)

Looking at these charts, I’m not sure you can really use research and development intensity, the G6 factor, on its own. What are your thoughts on this backtest? Please share them in the comments section below.