Momentum Investing

The premier market anomaly

By definition, momentum is the tendency to stay in motion. Momentum investing, then, assumes securities that have performed well relative to their peers (the winners) continue to outperform, while securities that have performed poorly (the losers) continue to under perform.

Momentum investing allows us the potential to:

Concentrate on the winners and circumvent the losers.

What you don’t own can be just as important as what you do own. Instead of buying many assets in small percentages in hopes of diversification, we focus only on those assets that are showing strong risk/reward characteristics, and avoid altogether those assets we find unfavorable. Why buy something if you expect it to fall in value?

Stay invested during bull markets, and reduce exposure in bear markets.

Market are made up of investors, and investors are people with behavioral biases. One of these biases, known as loss aversion, causes investors to hold onto losers too long and sell winners too quickly. Focusing on momentum should help us to hold onto winners as long as they’re trending positively, and sell losers quickly as the reverse trend.

Active Risk Management

Conditions change. You market exposure should too.

A portfolio’s asset allocation – its mix of stocks, bonds and cash – has the greatest impact on returns over time. Yet most managers maintain a static allocation through all market cycles. Our portfolios, however, systematically adjust their level of market risk to current market conditions in attempt to maximize the amount of value added.

To illustrate how our portfolio’s market exposure changes over time, we invented the BetaBarometer. Each portfolio has its own barometer, and the reading is updated as underlying positions change to show if the portfolio is Optimistic, Neutral or Cautious.

Beta is a measure of correlation to the S&P500. So if a portfolio’s beta is 1, its return is expected to be perfectly correlated with the S&P500. If a portfolio’s beta is 0.5, its return is expected to be half of the S&P500, either positively or negatively.

If a portfolio’s beta is negative 1, its return is expected to be opposite of the S&P500, either positively or negatively. So if the S&P500 fell by 5%, you could expect that the portfolio gains 5% over the same period.

While beta is only an estimation, and actual returns vary from expectations, the BetaBarometer is a useful tool for setting expectations and seeing how our process is adding value over time.

Watch the video to see the BetaBarometer in action, or click here  to learn more.

Systematic Process

Multi-Factor Ranking System

1. DEFINE the investment universe

Each portfolio driven by the Multi-Factor Ranking System will track a different investment universe to achieve its objective. In the end diversification benefits don’t come from the number of positions held within a portfolio, but from the correlation relationship between the positions. For that reason we look for investments that have low, or even negative, correlations to each other.

2. RANK the investment universe

The Multi-Factor Ranking System is primarily driven by price momentum with standard deviation a subordinate factor. Inside the ranking algorithm, price momentum accounts for a majority of the score.

3. CONSTRUCT the portfolio

The portfolios invest in the top ranked positions, as determined by the Multi-Factor Ranking System, while avoiding the lower ranked positions altogether. This is in attempt to overweight those parts of the market viewed most favorably, and to try and add value by avoiding losers. Some portfolios may also include other positions to diversify the portfolio and help guard against reversals in momentum.

4. REBALANCE on a monthly basis

Our analysis indicates that the optimal holding period is one month. This period gives the momentum factor time to materialize while
reducing transaction costs and portfolio turnover.