RS and Value: Enlightened Asset Allocation

Several months ago, Mike made the case for replacing your traditional growth strategies with relative strength.  For anyone in this business who is looking to add value through asset allocation, that post is a must read.

See the chart below for an example of this concept in action.

(Click to Enlarge)

Source: Ken French Data Library and Russell Investments

The red line is a 50/50 mix of the Russell 1000 Growth Index and the Russell 1000 Value Index.  Combining growth and value has been industry practice for decades and chances are that most advisors follow this approach to asset allocation.  However, a more enlightened approach would be to combine relative strength and value.  The blue line is a 50/50 mix of a Ken French momentum index and the Russell 1000 Value Index.  The data for the Ken French momentum index is taken from his online data library.  That particular momentum index consists of stocks from the top half of market cap from his universe and the top third of relative strength.  His index is rebalanced monthly.  As shown in the chart, much higher returns were earned by mixing relative strength and value rather than the traditional approach of mixing growth and value.

Past performance is no guarantee of future returns.

2 Responses to RS and Value: Enlightened Asset Allocation

  1. […] of a good way to improve your core equity exposure by combining relative strength with value.  This isn’t the first time we’ve written on this topic, but I think it is not being widely implemented.  Relative strength is a trend continuation factor […]

  2. […] must then decide how to find complementary return factors.  We have previously written about the benefits of combining relative strength and value, for […]