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

Private credit becoming 'big piece' of annuities, T. Rowe exec says
Private credit becoming 'big piece' of annuities, T. Rowe exec says

Goldman Sachs retirement survey finds 83% want guaranteed income, while the annuities providing that income increasingly hold private credit.

Zocks debuts Claude plugin with seven skills for financial advisors
Zocks debuts Claude plugin with seven skills for financial advisors

The AI meeting assistant's Advisor Intelligence plugin turns client conversation data into annual reviews, tax scans and attrition alerts.

Stifel settles massive $30 million complaint involving star broker’s sale of structured products
Stifel settles massive $30 million complaint involving star broker’s sale of structured products

Chuck Roberts and Stifel have been facing scrutiny due to sales of structured products and structured notes.

SEC floats CFP route to accredited investor status, fund rules refresh amid private market push
SEC floats CFP route to accredited investor status, fund rules refresh amid private market push

Among other updates, the proposals would let advisors to regulated funds earn performance fees and allow interval funds to offer monthly repurchases.

The Year Is 2046 and I’m a Financial Advisor 
The Year Is 2046 and I’m a Financial Advisor 

What will financial advice look like 20 years from now? Evan Vladem explores how AI may transform wealth management while reinforcing the enduring value of human guidance, trust, and empathy. 

SPONSORED In the Age of AI, Trust Becomes the Advisor's Greatest Asset

As AI makes financial information more accessible than ever, Lana Hock explains why human judgment, trust, and empathy remain the qualities clients value most in a financial advisor

SPONSORED Direct indexing webinar targets tax-loss harvesting amid market swings

Northern Trust’s Ken Lassner shows advisors how to convert volatility into after-tax portfolio gains