Writing in Pensions & Investments magazine, Khalid Ghayur summarizes the merits of combining momentum and value strategies:
While research has shown that value stocks outperform the market over the long run, value strategies can underperform significantly during shorter periods. Capturing the full extent of value returns requires a long-term commitment on the investor’s part. However, periods of pronounced underperformance often negatively affect investors’ ability to “stay the course.”
Our research documents that a highly diversified strategy that combines value stocks with high price-momentum stocks (i.e., stocks with a high trailing 12-month total return) offers important risk reduction benefits to investors. It allows investors to stay invested for the long term by significantly mitigating potential underperformance in the short term.
Academic research has documented that value and momentum have provided significant market outperformance, or active returns, over the long run. Value and momentum are powerful and persistent sources of active returns, as depicted in the chart below.
My emphasis added. We’ve written a lot in the past about what a good portfolio mix relative strength and momentum make together. This article just makes the same point. There’s another important issue embedded in his article that ought to be of interest to advisors still using style boxes. He mentions that “momentum serves as a better diversifier to value than growth.” In terms of portfolio construction, you may be better off with value and relative strength than with value and growth. This viewpoint is likely to become more widespread, because as Mr. Ghayur points out:
Not surprisingly, Morningstar Inc. recently announced it soon will begin giving stocks a momentum score and then use it to give mutual funds a momentum ranking. This may ultimately lead to a new momentum investment style category for mutual funds.
Why wait for a mutual fund? You can be the first advisor on your block to use our already-available Systematic Relative Strength portfolios, which are separate accounts designed to capture momentum returns. Alternatively, there are three PowerShares Technical Leaders indexes designed to capture momentum returns. I must admit, though, that it’s nice to see industry leaders like Morningstar coming around to our point of view!
To receive the brochure for our Separately Managed Account strategies, click here. More information about PDP can be found at www.powershares.com.
Click here for disclosures. Past performance is no guarantee of future returns.
Click here to read the entire article, including the results of combining a value and momentum strategy from 1940-2009.
[...] value are the most prominent return factors that have proven themselves over time. Better yet, create a portfolio that uses them both, because they mesh together very [...]
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