If you don’t want to take the time to read the recently released white paper Fact, Fiction and Momentum Investing by Israel, Frazzini, Moskowitz, and Asness, you might want to read the summary published by The Economist:
IF THERE is a greater mystery in financial markets than momentum, it is hard to think of one. Why should stocks that have been rising keep going up? Surely this is widely avaialble information that will be quicky exploited by investors, if the market is remotely efficient? And yet the momentum effect has been remarkably persistent.
In a new paper, renowned quant Cliff Asness, some colleagues from AQR and Tobias Moskowitz of the University of Chicago examine what they call “Fact, Fiction and Momentum Investing”. The most important point is the size and volatility of the return; some dismiss momentum as too small and sporadic a factor to exploit.
Here are the numbers. The table needs a bit of explanation. SMB refers to the well-known smallcap effect; this portfolio goes long smallcap stocks and short largecap. HML refers to the value effect, specificially the tendency of companies that are cheap, relative to their book value, to outperform. So this portfolio goes long stocks with a high book value, relative to their market cap, and short companies with a low book value. And UMD is the momentum measure; a portfolio that goes long stocks that have performed strongest over the last 12 months and short the stocks that have been weakest. The returns are annual.
SMB HML UMD
1927-2013 2.9% 4.7% 8.3%
1963-2013 3.1% 4.5% 8.4%
1991-2013 3.3% 3.6% 6.3%
As you can see, momentum is the biggest of the three effects. Lots of people practice value investing and smallcap investing, even though the returns have been lower than for momentum.
The full Economist article can be found here.
