Does Mutual Fund Performance-Chasing Deserve its Bad Reputation?

A recent CFA Institute article discusses mutual fund performance-chasing which it says has drawn criticism. To evaluate how performance-chasing is faring in the U.S., the CFA Institute replicated momentum investing strategies using data spanning from 2000 to 2018, creating long-only portfolios made up of the top and bottom 10% of funds. The article reports: “We found the best-performing funds beat an equal-weight index of all equity mutual funds as well as the worst-performing funds by… Read More

Considerations in Momentum Investing

By Justin J. Carbonneau (@jjcarbonneau) —  About a week ago CNBC had a piece that broke down how much the largest, best performing stocks have contributed to the overall market’s rise this year as tracked by the S&P 500. The table below shows that 99% of the market return in 2018 can get boiled down to a handle of tech darlings — Amazon, Netflix, Microsoft, Apple, Alphabet (Google) and Facebook. The average return of all… Read More

Momentum Investing Works Until it Doesn’t

A recent article in InvestmentNews highlights how momentum investing—buying shares of whatever is rising the fastest and selling when these stocks “lose steam”–has been performing well of late. However, the article warns, that unless investors “have a long holding period and an appetite for risk, it might be better to wait until momentum cycles in and out of style once again.” A type of growth investing, a momentum approach is not “inherently wrong,” the article… Read More

Hulbert Says Momentum Investing Lives

There are still good reasons for investors to pursue a momentum strategy, writes Mark Hulbert in a recent Wall Street Journal article. He offers data collected by Eugene Fama (University of Chicago) and Kenneth French (Dartmouth College) showing that over the past ten years the stocks in the top decile vis a vis performance outperformed the S&P 500 by just 1.3 percentage points. “That is less than one-fifth as much as the strategy’s average annual… Read More

Morningstar Compares Research Data to Real-World Investing

There is an abundance of research data regarding how investors can maximize returns, but it doesn’t necessarily translate into real-world results, according to a recent Morningstar article. Alex Bryan, Morningstar’s director of passive research in North America, shared his insights on some discrepancies between the two: Fama-French Value Factor: In 1992, these economists found that stocks trading at low valuations, specifically low price-book ratios, have tended to provide higher returns than those trading at higher… Read More

Adding Momentum to Your Portfolio

The tendency of recent market performance to persist, an effect known as momentum, has been pervasive even though it is a “blatant violation” of what you would expect in an efficient market. This according to Alex Bryan, director of passive strategies research for Morningstar, in a recent interview. Bryan explains that extensive research has uncovered three theories behind this: Behavioral biases. Investors may underreact to new information because they “anchor” their investment strategies to old… Read More

Momentum Investing is Back, At Least for Now

The strategy of buying whatever sector has had the greatest price or earnings gains in the past twelve months seems to have come back in fashion, according to a recent article in Investment News. The article cites a recent white paper by AQR that addressed momentum investment results and reported that “trend-following has delivered strong positive returns and realized a low correlation to traditional assets classes for more than a century.” At the Morningstar ETF… Read More

The Payoff and Perils of Momentum-based Stocks

Many investors follow momentum-based methods or approaches when investing in equities, but does momentum investing actually work and what are the results? This is the basis for a recent AAII article by Charles Rotblut, CFA, vice president at AAII and editor of the AAII Journal. Relative price strength, which compares the price performance of a security to another security or the overall market or an industry, is one of the most popular ways to identify… Read More

Market Shifting From Momentum to Value

A pair of brief pieces in Barron’s, one by columnist Jack Hough and the other on behalf of JPMorgan, discuss the implications of the recent selloff in momentum stocks. As Hough explains, “momentum investing refers to the practice of buying what’s already going up” and can be used within a broader strategy, such as by “looking for recent stock momentum among [a portfolio’s] value picks” when rebalancing. Many portfolios employing a “long/short momentum” strategy lost… Read More

Adding an Acceleration Factor to Momentum Investing

In a post on the CFA Institute’s Enterprising Investor blog, Joachim Klement of the CFA Institute Research Foundation highlights research suggesting that “one can improve the results of traditional momentum investing by looking at momentum acceleration.” Klement expresses some skepticism regarding momentum investing – “why should prices go up just because they have gone up in the past?” – and notes the risk of “momentum crashes.” Nonetheless, he notes that Cliff Asness and others have… Read More