Correction to the SP backtest proposal: It would be 10 years of fundamentals and five years for estimates; for any model that uses both, you’d have to assume a 5-year test period.
As to the transferability of ratios and factors, I assume most or all would be reproduced; the FactSet fundamental database is, actually, a copy of the Reuters database that Reuters has to license to them as part of an antitrust settlment needed to allow the 2008 Thomson and Reuters merger to go through; that’s relevant to p123 because we started with Reuters and then, in 2012, we busted our you-know-whats to get everything translated to Compustat. The main differences between Compustat and FactSet will be in the as-ofs and timing, and in standardization algorithms.
The latter are remarkably imprecise in the world of finance. One example I can recall off the top of my head is how cost of sales is computed fur purposes of getting a gross margin. Some add income-statement to cost of sales, others do not. Who is right? Everyone says they’re right and the other guy is wrong and each has an equally persuasive argument. Lots and lots of things like that. This, by the way, is what is meant by “standardization.” No two companies format their financial statements with the exact same sets of line items, so none of the work would be do-able unless we could standardize the data; that’s the hear of the data provider’s intellectual property – it had better be because they have no rights to the raw numbers which, by law, are in the public domain.
So again, there will be differences. The real issue is whether FactSet is a credible provider. In this regard, the company (ticker: FDS) has market cap of $9.6 bl. and TTM rev of $1.435 bil. ROE is 53.38% (5Y) and 58.89% (TTM). ROA is 27.38% and 23.77%. S&P (SPGI) also has good numbers. The key is that with FactSet, whatever quibble one may have with it (or S&P), its not like we’ll be getting data from Slick Sam whose office is on the left bank under the bridge. FactSet is a real company and like S&P, its data is used by many, many, many serious professionals, just like with S&P, and just like Reuters now known as Refinitiv and soon to be known as that company the London Stock Exchange is buying. There are others out there, but these are the three major players.
Marco and I had occasion, a few years ago when S&P started acting a bit nuts, to get sample FactSet data and do a deep dive. S&P calmed down a bit so we didn’t see a pressing need to continue on with FactSet, but we had seen enough back then to recognize that FactSet would be a sensible alternative if we needed it. Now, we need it.