The next factor in Mohanram G-Score is G8, advertising intensity. This factor also looks at another growth investment that conservative accounting doesn’t really capture as an asset for future growth. Advertising intensity is calculated by taking current annual advertising expenses and dividing by total assets.
I was hoping to accurately backtest advertising intensity, but advertising expenses are not broken out on Portfolio123. Instead, I had to use selling, general and administrative expenses (SG&A), which includes advertising as well as staff salaries, rent, travel, utilities and other indirect costs.
Here are the backtest rules I ran on Portfolio123 to test SG&A Intensity on stock performance:
I used the annual SG&A expenses instead of the trailing twelve month SG&A expenses to avoid more missing values. I still had to filter out some stocks with missing annual SG&A numbers. The backtest results are in the table below.
Summary of Results for G8: Advertising/SG&A 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.
There doesn’t really seem to be any pattern to the average excess returns for SG&A intensity per quintile. Surprisingly, the top 20 percent of companies ranked by SG&A intensity in their industry average -0.96 annual excess returns over the test period. Similar to the G7 factor, the 3rd quintile with the most average SG&A intensity had the highest average excess returns but they were still only a modest +0.38%. The problem might be that advertising is only a modest portion of SG&A for most companies. Ideally, I’d be able to look at just advertising expenses.
Mohanram G-Score: G8 Advertising/SG&A Intensity Returns (2002 – 2020)
What are your thoughts on this backtest? Please share them in the comments section below.