Opinion: Momentum stocks can give you an edge, researchers say

Investing in so-called “momentum” stocks — that is, buying stocks that have risen with the expectation that they will continue to rise in price — is the best-recorded “advantage,” the researchers say. The most durable on the market.

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Its success is “a proven fact” and can be proven across multiple assets and over 212 years of stock market data argues that money managers Cliff Asness and his colleagues. It’s the “top market anomaly”, analyst Gary Antonacci writes. It troubles a simple “buy and hold” stock market strategy that goes back to almost 100 hundred, Meb Faber money management estimate.

And, crucially, it was the only one of the so-called factors that seemed to be getting stronger, not weaker. So at least, argue Simon Smith of the Federal Reserve and Allan Timmermann, chairman of finance at UC San Diego. While investing in cheap “value” stocks and in small-company stocks has not produced the superior returns promised in recent years or decades, momentum has turned for the better. than.

For example, over the past five years, iShares MSCI USA Momentum Factor ETF
MTUM,
-2.17%

outperformed the SPDR S&P 500 ETF Trust
SPY,
-0.87%

equal to a clear 30 percentage points and iShares International Momentum Factor ETF
IMTM,
-0.55%

Vanguard Developed Markets ETF FTSE
VEA,
-0.50%

equal to 12 points. In the tumultuous times of the Covid crisis since March 2020, you’ve made more money just on hot “motivational” stocks like Tesla
TSLA,
-6.42%,
Amazon
AMZN,
-1.38%,
Microsoft
MSFT,
-1.97%,
Google
GOOG,
-0.87%

and Apple
AAPL,
-1.17%

compared to if you just stick with the S&P 500.

So is that so? Just buy a “motivational” fund and forget about it?

Not too fast. Never mind that momentum investing has really followed the market so far this year. Or momentum stocks that were badly knocked out during the market turmoil a year ago.

Most importantly: You can do better.

So estimates Joachim Klement, a trustee of the CFA Institute Research Foundation and chief strategist at Liberum in London. Since the start of last year’s crisis, he has run a more complex portfolio of momentum stocks. It has managed to beat straight momentum, with less risk.

Klement’s so-called “Invincible” portfolio consists of stocks that simultaneously show positive momentum over multiple periods, not just one or two. These are stocks that have risen in the past month, and in the previous two, five, and 11 months. Academic research has outstanding performance for stocks shows “overlapping” momentum over multiple periods. Klement updates portfolios for clients monthly.

So this portfolio, for example, has generated nearly twice the returns of MSCI USA Momentum so far this year, up 33% from USA Momentum’s 17% (and 25% for the S&P 500). . And that’s even after allowing for huge theoretical transaction costs – 1% every time you buy a stock and 1% every time you sell it. In the UK, the business is even bigger – because, Klement argues, there he already includes small and medium sized stocks, not just large companies. The momentum effect looks stronger for small and mid-cap stocks.

Incredibly, since May of last year, Invincibles’ portfolio has only had a negative month.

And there is also an inherent cautious bias toward this portfolio, because it only holds stocks with positive tracking returns. In a bear market, you may not be invested in anything. As Meb Faber and others have pointed out, momentum strategies can help you avoid the worst of the market turmoil.

Klement’s latest Invincibles list for the US includes about 100 of the S&P 500 stocks, from Ford
NS,
-3.67%,
Synthetic engine
GM,
-2.15%

and Tesla
TSLA,
-6.42%

to Chevron
CVX,
-0.63%,
Boston Attributes
BXP,
-0.24%,
Home Depot
HD,
+ 0.01%,
Lowe’s
SHORT,
-0.68%,
PepsiCo
PEP,
+ 2.55%,
Amazon, Wood Company Weyerhauser
SO,
-0.47%

and the Darden . restaurant chain
DRI,
-0.49%.

One of the most interesting aspects of this portfolio is not only that it has so many numbers that are hard to back up, but that it is theoretically accessible to any average investor who could sift through. stocks by monthly performance.

My biggest problem with “momentum” as an investment strategy is that you are essentially giving up any effort to do your own fundamental analysis. To me, it’s like the stock market equivalent of “social” media, jumping on the latest wave of mob frenzy regardless of value.

But maybe that’s why I should do it. If Rome is falling, and the Dark Ages are coming, shouldn’t I give up and bet on the Destroyer?