Sorry, Growth…Momentum Is Just a Better Fit

For decades the investment industry has embraced the concept of mixing growth and value.  This is based on the idea that because the two styles are not perfectly correlated there are diversification benefits possible by mixing the two.

However, we frequently make the case that investors are likely to achieve better results by replacing their growth exposure with momentum.  Others have also made this case.  In fact, click here for an excellent white paper by AQR Capital on the topic.

As an illustration, consider the chart below which compares the performance of a momentum/value combination and a growth/value combination.

(Click to Enlarge)

Source: Ken French Data Library*, Russell Investments

The momentum index is based on an index maintained at the Ken French Data Library and is composed of US stocks from the top half of capitalization and top third of momentum in his universe.  As shown above, $100 in the momentum/value combination turned into $423 while $100 in the growth/value combination turned into only $292.

Sorry, growth…momentum is just a better fit.

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