Excess Returns, Ep. 25: An In Depth Look at Momentum Investing

Momentum investing is difficult to understand for many investors. While a concept like value that involves trying to buy stocks at a discount to what they are worth resonates with many, the idea of betting that stocks that have already gone up will go up more can be much more difficult to understand. In this episode, we take an in depth look at momentum investing. We discuss: The different types of momentum and ways to… Read More

Hulbert: A New Approach to Momentum Investing

New research has shown that a more effective way to profit from the momentum effect is to buy the “hottest” factors rather than the best-performing stocks. This according to a Wall Street Journal article by Mark Hulbert, founder of Hulbert Financial Digest. Researchers found that stocks held in a high-momentum portfolio tend to share the same “factors” and that the “real momentum effect actually takes place at the level of these factors rather than individual… Read More

Momentum Investing – the What, the Why, the How and the Risks

By Justin Carbonneau (@jjcarbonneau) At the most basic level, momentum investing in the context of security selection can be defined as buying securities that have done the best over the past 12 months and selling those that have done the worst. While there are multiple methods and timeframes used to measure momentum, which we’ll get into below, the idea of buying based on price strength and selling based on price weakness is at the core… Read More

Study Claims That the Momentum Factor Doesn’t Work

A new study from Dimensional Fund Advisors concludes that fund managers “can’t find a way to profit” from the momentum factor, according to an article in Institutional Investor. The study, which evaluated 11 U.S. momentum-style equity funds with at least three years of history, found that the “majority of these portfolios weren’t able to deliver above-market return for investors after fees.” The oldest fund dated back to 2003, and the study found that while most… Read More

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