Leuthold’s January Green Book includes a simple, yet compelling study about applying momentum at the asset class level:
While even academics now acknowledge the existence of a “price persistence” effect at the stock and industry group level, it is less well known that the phenomenon exists at the broad asset class level. We’ve examined a few simple approaches in which allocation decisions are based purely on the prior year’s total return performance of seven asset classes: Large Caps, Small Caps, Foreign Stocks, REITs, Commodities, Gold and U.S. Treasury Bonds. Contrarians might be surprised to learn that a turnaround strategy of buying last year’s laggards (the #5, #6 and #7 performers), has been a consistently poor approach for the last 40 years. Meanwhile, a naive, momentum-surfing strategy of buying last year’s #1 or #2 performer (or both) has soundly beaten the S&P; 500 since 1973. (We suspect these results are especially humbling to those who spend the rest of the year building and monitoring elaborate tools that track valuations, the economic cycle, investor sentiment, etc.)
(printed with permission from Leuthold)
Bottom line: momentum also works well at the asset class level. Click here for a white paper written by John Lewis that also confirms that momentum can be successfully applied to a group of asset classes.
[…] Momentum works at the asset class level. (Systematic Relative Strength) […]
Great post.
What I’ve not seen, and would like to see:
A lot of studies I’ve seen exploring momentum (and value for that matter) at the asset class level will use one set of asset classes / ETF’s (like the 7 in this post). Of course, there are always ‘sound reasons’ for having selected them - and that’s what concerns me; the reliance on ‘sound reasons’ for having picked that basket of ETF’s.
I think the paper by John Lewis gives assurance that it works anyway, but what I’d still like to see is a test where, from a universe of “all” ETF’s, all possible groups of 5, all possible groups of 6, 7, 12 etc groups of ETF’s are tested. In other words, basically saying, if someone picked any 7 ETF’s from this group and had applied momentum - what would have happened (on average, along with best and worst).
Do you see what I mean?
Hi Steve,
The testing in John Lewis’ white paper was done using holdings of 10 ETFs. I am not sure that the results would have been materially different had we just used 7 holdings (other than being more volatile).
As you point out in your comment, ‘sound reasoning’ was not a factor in our testing. The only input was relative strength rankings of the universe of ETFs.
I find it interesting that whether you use Leuthold’s simplistic momentum strategy on asset classes or whether you use the process employed in John Lewis’ white paper, the conclusion is the same: Momentum can be successfully applied to asset class rotation.
[…] Price persistence at the asset class level - via Systematic Relative Strength […]
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