Gulf between MOM research and MOM fund results

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Gulf between MOM research and MOM fund results

Post by garlandwhizzer » Sat Jun 23, 2018 2:08 pm

The following quote is from Rob Arnott who looked at fund results from 1990 to 2016 of all mutual funds who called themselves momentum funds. Arnott looks at both price momentum, 1st method, and earnings momentum, 2nd method. His results are interesting.

Direct quote from article: ... be-saved-1
These so-labeled momentum funds were the worst-performing category of funds in our research in terms of value-add relative to the market. On average, they underperformed the market −2.2% a year when weighting by the first method, and by a whopping −4.3% a year using the second method. These funds yielded an average −2.6% CAPM alpha and −3.1% four-factor alpha (using the Fama–French three-factor model plus the standard momentum factor). In other words, the investors in these funds experienced a 3.1% annualized average shortfall relative to the performance of the paper portfolios their factor loadings were replicating. If these funds had been able to fully capture their factor premia, they would have outperformed the market by roughly 0.9% a year (3.1% better than their 2.2% average shortfall).
This is 26 years of serious underperformance by real funds pursuing the MOM style. The academic research on MOM finds that it produces significant outperformance on a very reliable and consistent basis. Yet over this long time frame it hugely underperformed beta. In this particular case, the investing results of all funds that included MOM in their names, using both price MOM and earnings MOM, do not square with the optimistic picture painted by academic backtesting models. Such is sometimes the gulf between academic studies and real investing results.

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Re: Gulf between MOM research and MOM fund results

Post by nedsaid » Sun Jun 24, 2018 12:58 am

American Century Investments built their brand primarily on earnings momentum with less emphasis on price momentum. This strategy has run both hot and cold. Their Large Cap Growth funds, particularly Growth and Select, were market leaders back in the 1970's and into the 1980's. Their Large Cap funds then started trailing the market and I went into their Mid-Cap sector with their Heritage and Vista funds. Heritage was a great fund for years but performance has trailed off in recent years. Ironically, last I looked their Large Cap funds did well during the last decade, just beating the S&P 500. Their current Large Cap funds like Growth, Select, and Ultra have been performing well.

I have owned such funds for many years, my experience is that they run hot and cold. Sometimes they perform brilliantly and other times you wish you had never owned them.

American Century experimented with price momentum funds with lesser emphasis on earnings momentum. This funds seemed to do less well than their more traditional funds that focused on Earnings Momentum. These funds seemed even more uneven in performance but I never invested in them. The earnings momentum seemed like the better strategy to be as it was based more on market fundamentals rather than investor enthusiasm.

Another issue is that American Century's edge with a proprietary program that identified companies with accelerated earnings deteriorated over time. Everyone else was getting better computer hardware and software too.

So that has been my experience with momentum investing.
A fool and his money are good for business.

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Re: Gulf between MOM research and MOM fund results

Post by jbranx » Sun Jun 24, 2018 2:07 am

Pretty convincing evidence that the data is tortured until it confesses, as per Edesess. I too invested in Amer. Century Select and others, including Giftrust, and watched the performance deteriorate. Turnover was unbelievable. Giftrust was small cap growth and was eventually canned. All the momentum probably suffers from the old Value Line fault: looks great on paper but fails when it gets implemented. Factors seem very cyclical to me, and without decades left to realize the forecasted alpha, I shall just stick with the market factor. I know there is a law that says there is some portfolio that always outperforms mine, and that's now okay.

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Re: Gulf between MOM research and MOM fund results

Post by Northern Flicker » Sun Jun 24, 2018 11:59 pm

If you have a computer simulate flipping a fair coin a trillion times, and analyze the data, you are likely to find long sequences of H and T as an artifact of chance. From a research perspective it is very difficult to distinguish probabilistic outcomes from causal momentum.

Correct me if I’m wrong, but I don’t think there is a risk-based explanation for momentum that is consistent with the efficient market hypothesis, so you have to be willing to deny EMH to believe in momentum.

Maybe the momentum effect is real and EMH is false, but I can’t say I’m all that enamored with the idea of an investment strategy whose success depends on EMH being false.
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