Momentum investing is gaining momentum

MAY 14, 2013
Momentum investing is starting to pick up steam, which means it is time to rethink the role that growth stocks play in a portfolio. Growth stocks traditionally have been combined with value stocks in a portfolio, but research suggests that a momentum strategy actually may pair better with a value strategy. A portfolio of 50% allocated to the Russell 1000 Value Index and 50% to the AQR Momentum Index would have beat a half-growth and half-value portfolio by about 20% over the 10-year period ended Dec. 31, without adding any extra volatility, according to Morningstar. “If you just combine value and growth, you're neutralizing your value bet,” said Samuel Lee, an exchange-traded-fund analyst at Morningstar Inc. Value and momentum, which typically invests in the best-performing stocks over the previous 12 months, complement each other well for a couple of reasons. For one, momentum has proved itself to be a source of high returns over many different time periods and asset classes. “Momentum is one of the most powerful patterns that exist in markets,” Mr. Lee said. “It's been found in almost every single market, from commodities to bonds to even Victorian-era stocks.” Momentum investing is a way for investors to take advantage of the naturally occurring phenomena. “It's a systematic way to exploit the fact that humans chase performance,” Mr. Lee said. “Everyone knows performance chasing is bad, and everyone knows everyone does it,” he said. “Momentum investing is a disciplined way of taking advantage of that irrational behavior.” Value and momentum also work best over different time horizons. Value is about exploiting pessimism over the long term, whereas momentum is about exploiting optimism over the short term, Mr. Lee said.

RELATIVELY UNKNOWN

The biggest challenge that momentum strategies have faced is that they still are relatively unknown outside institutional investing, and there are only a handful of funds designed to offer exposure to them. AQR Capital Management, one of the leaders in momentum-investing research, launched the first, and only, three momentum-focused mutual funds in 2009. Combined, they have just over $1 billion in assets. Russell Investments launched the first momentum ETFs in 2011, but they were shut down after Russell decided to exit the ETF business. BlackRock Inc. is the latest fund company to try its hand at momentum investing. It launched the iShares MSCI USA Momentum Factor ETF last month. “I think it's probably the most credible momentum ETF to come out to date,” Mr. Lee said. He highlighted the ETF's low costs — it charges 15 basis points — and its use of both 12-month returns and six-month returns as its best features. “When you blend them together, it enhances consistency,” Mr. Lee said. The lack of popularity for momentum strategies could be a good thing. “If everyone suddenly bought momentum funds, they would no longer work,” Mr. Lee said.

Latest News

Farther debuts AI investment proposal tool for advisors to win clients
Farther debuts AI investment proposal tool for advisors to win clients

"Im glad to see that from a regulatory perspective, we're going to get the ability to show we're responsible [...] we'll have a little bit more freedom to innovate," Farther co-founder Brad Genser told InvestmentNews.

Barred ex-Merrill Lynch advisor arrested in alleged $2.6M theft of former Miami Dolphin Pro Bowler
Barred ex-Merrill Lynch advisor arrested in alleged $2.6M theft of former Miami Dolphin Pro Bowler

Former advisor Isaiah Williams allegedly used the stolen funds from ex-Dolphins defensive safety Reshad Jones for numerous personal expenses, according to police and court records.

Are you optimally efficient?
Are you optimally efficient?

Taking a systematic approach to three key practice areas can help advisors gain confidence, get back time, and increase their opportunities.

Advisor moves: Father-son duo leaves Raymond James for LPL, RayJay adds Merrill Lynch alum in Florida
Advisor moves: Father-son duo leaves Raymond James for LPL, RayJay adds Merrill Lynch alum in Florida

Meanwhile, Osaic lures a high-net-worth advisor from Commonwealth in the Pacific Northwest.

Beacon Pointe adds six RIAs in two-month acquisition spree, boosting AUM by $2.7B
Beacon Pointe adds six RIAs in two-month acquisition spree, boosting AUM by $2.7B

The deals, which include its first stake in Ohio, push the national women-led firm up to $47 billion in assets.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.