The Momentum Factor: Its Not Just For Breakfast Anymore
Oh, and it survives t-costs, and studies that say it doesn’t are just poorly done nonsense.
https://www.aqr.com/cliffs-perspective/ ... 20it%20Too
The Momentum Factor: Its Not Just For Breakfast Anymore
Oh, and it survives t-costs, and studies that say it doesn’t are just poorly done nonsense.
I assume so Dave but I haven't read it thoroughly yet. Just skimmed it but they are discussing MOM so I take that to mean CS Momentum.Random Walker wrote: ↑Wed Dec 06, 2017 5:23 pm Thanks Matjen for posting the article. I assume this article is discussing CS Momentum as opposed to TS Momentum?
Dave
Funny. I purchased a MOM fund after reading suggestions here that MOM works well with value. Not having access to AQR I went with MTUM.garlandwhizzer wrote: ↑Wed Dec 06, 2017 6:57 pm Perhaps 9 years isn't long enough for MOM to show its superiority as true factor adherents believe.
I would challenge the notion that the funds you are comparing operate in the same arena. Momentum and growth are two entirely different investing concepts. A four-factor analysis (market, size, value, momentum) of VUG shows that it has no exposure to Momentum, as you point out. What it does have are statistically significant negative exposures to size and value. You can think of it as an "anti-SCV" fund. AMOMX has exposure to Momentum and no significant exposures to size and value. Two entirely different animals here. Comparing two funds with entirely different factor exposures over such a short timeframe doesn't really tell you anything.garlandwhizzer wrote: ↑Wed Dec 06, 2017 6:57 pm Let's look at the performance of AQR's 2 MOM funds which presumably over a significant time period will reflect this outperformance. Let's compare their returns to funds which operate in the same market arena, growth, and in the same cap weight segment. That seems to be the appropriate comparison, small cap MOM versus small cap growth index, both active in the same market segment but one, growth, which pays no attention to the MOM factor, only to profit growth. Likewise, large cap MOM versus large cap growth index which again pays no attention to the MOM factor.
By the way, what explains the statistically significant -2.23% Annualized Alpha (α) of AMOMX (AQR Large Cap Momentum)?DaufuskieNate wrote: ↑Thu Dec 07, 2017 7:05 amI would challenge the notion that the funds you are comparing operate in the same arena. Momentum and growth are two entirely different investing concepts. A four-factor analysis (market, size, value, momentum) of VUG shows that it has no exposure to Momentum, as you point out. What it does have are statistically significant negative exposures to size and value. You can think of it as an "anti-SCV" fund. AMOMX has exposure to Momentum and no significant exposures to size and value. Two entirely different animals here. Comparing two funds with entirely different factor exposures over such a short timeframe doesn't really tell you anything.garlandwhizzer wrote: ↑Wed Dec 06, 2017 6:57 pm Let's look at the performance of AQR's 2 MOM funds which presumably over a significant time period will reflect this outperformance. Let's compare their returns to funds which operate in the same market arena, growth, and in the same cap weight segment. That seems to be the appropriate comparison, small cap MOM versus small cap growth index, both active in the same market segment but one, growth, which pays no attention to the MOM factor, only to profit growth. Likewise, large cap MOM versus large cap growth index which again pays no attention to the MOM factor.
This does. Congratulations though.in_reality wrote: ↑Thu Dec 07, 2017 7:21 am
By the way, what explains the statistically significant -2.23% Annualized Alpha (α) of AMOMX (AQR Large Cap Momentum)?
Why does MTUM (iShares large cap momentum) have a statistically significant positive Alpha?
They have about the same MOM loadings and very different returns.
My take is that theoretical backtesting doesn't reflect the real life choices that are made for the methodology of an actual fund. It seems from the wide differences in two MOM funds with similar MOM loadings that it makes all the difference in the world.
But one thing is clear: the bulk of the returns MTUM is capturing are probably unrelated to the academic momentum factor that has historically generated all the “buzz.”
However, the portfolio construction methodology suggests this fund is more of a mega-cap, low-beta-ish, quasi-momentum fund
1+In_reality wrote:
My take is that theoretical backtesting doesn't reflect the real life choices that are made for the methodology of an actual fund. It seems from the wide differences in two MOM funds with similar MOM loadings that it makes all the difference in the world.
You are simply incorrect on Primecap's factor loadings. It is -0.1 to -0.2 in value loading, +0.1 to 0.2 in size loading, and basically indistinguishable from zero for momentum and quality, depending on the factor model you choose in Portfolio Visualizer. This basically comes out in a wash.garlandwhizzer wrote: ↑Thu Dec 07, 2017 12:17 pm 1+
This is the whole point. Factor analysis alone does not accurately determine future performance. It's that simple. The idea that you can prospectively select positive factor loads in either single factor or multi-factor funds and they will reliably and definitely outperform in the future is quite simply overstating the case. As I have pointed out before, Vanguard's Primecap Fund, looks terrible on factor analysis, significantly negative on summing up MOM, VAL, QUAL, and SIZE. On retrospect over its lifetime, dating back to 1984, 33 years, plenty of time for factor superiority to show up, the Primecap Fund has shown consistent and massive outperformance of both beta and of factor approaches including the darling of SCV funds, DFSVX, since DFSVX's inception in 1992. On factor analysis alone, Primecap looks like a massive long term loser on either single factor or multi-factor approaches. In reality, it massively and consistently outperforms for more than 3 decades. Such is the Grand Canyon gap between how a real fund did and what its factor analysis predicted.
Warrant Buffett and Charlie Munger have a pretty impressive long term investing record and they believe strongly in value and quality, but they do not believe that indexes capture these rare and difficult to define attributes. They do not do factor analysis as per AQR. Clearly factor index analysis is not the sole determinant of future results as AQR demonstrates from the massive negative alpha of its MOM funds and their underperformance relative to beta and MTUM. After all, AQR is supposed to be the really smart guys. If I were to invest in a MOM fund, which I do not do, I would select MTUM, which uses a less rigid factor approach--larger cap, lower turnover--reducing the high costs which are a major hurdle in employing MOM strategies.
Garland Whizzer
Ok, if those are your preferred measures, let's do that.DaufuskieNate wrote: ↑Thu Dec 07, 2017 9:53 am
Let's compare AMOMX to MTUM using HmL Devil and a six factor analysis.
Using HmL Devil and extending the analysis to six factors (Market, Size, Value, Momentum, Quality, and Low Beta) as suggested as the best way to look at AMOMX, what do we see for QSPIX, MTUM and PRIMECAP?Ketawa wrote: ↑Thu Dec 07, 2017 12:47 pmYou are simply incorrect on Primecap's factor loadings. It is -0.1 to -0.2 in value loading, +0.1 to 0.2 in size loading, and basically indistinguishable from zero for momentum and quality, depending on the factor model you choose in Portfolio Visualizer.garlandwhizzer wrote: ↑Thu Dec 07, 2017 12:17 pm 1+
This is the whole point. Factor analysis alone does not accurately determine future performance. It's that simple.
Re: AQR, how can you make such definitive statements in light of the performance of QSPIX, which is pure factor investing?
Also, is it even true that factors are correlated across asset classes? Like, value in both stocks and commodities, or what not?Theoretical wrote: ↑Thu Dec 07, 2017 11:17 pm QSPIX has higher loadings on all the ju ... e returns?
You're missing the factor loading it does NOT have (much of), market factor/beta. QSPIX isn't set up to be an all-in-one Portfolio with a beta of 1. Its to have huge factor loadings with minimal beta or correllation to the stock market, also across multiple asset classes and not just stocks.
Also, the factors that have done well over the last ten years:
Market
Quality or (Profitability+Investment)
Low Beta/Betting Against Beta (almost to the same extent as market)
Term
Credit
Not so well
Size
Value
Momentum (US)
These construction decisions seem to have added value to the US Momentum Fund, less so for the US Small Cap Momentum and International Momentum Fund over this period.Compared to the indices, the live strategies utilize a number of more sophisticated portfolio construction decisions – many of which are meant to improve expected net returns. In particular, the live strategies utilize an evolved model that includes multiple measures of momentum and tilts towards higher momentum scoring names: weighting the top third of stocks based on a combination of their market capitalization and signal strength (in this case their momentum characteristic). The strategies rebalance more frequently than the indices (monthly rather than quarterly) to effectively capture the gross momentum premium. And, importantly, the live strategies include additional controls to manage liquidity, turnover, transaction costs, as well as other risk management concerns.
RobertWhile seven years of live experience is still too short to evaluate the efficacy of a style portfolio such as momentum (i.e., what is the true gross momentum premium?), it is sufficient to learn something about its implementability in practice.
QSPIX trades across multiple asset classes: currency, bonds, etc. with almost no exposure to equities. It shouldn't compete with equities. It's more bond like but even that isn't a great comparison. That makes it an alternative. In Reality, here's a question: if there are factors that are uncorrelated with market beta don't they have to underperform to some extent while market beta is on one of its biggest runs in history? This is recency bias.in_reality wrote: ↑Thu Dec 07, 2017 7:59 pmOk, if those are your preferred measures, let's do that.DaufuskieNate wrote: ↑Thu Dec 07, 2017 9:53 am
Let's compare AMOMX to MTUM using HmL Devil and a six factor analysis.
Using HmL Devil and extending the analysis to six factors (Market, Size, Value, Momentum, Quality, and Low Beta) as suggested as the best way to look at AMOMX, what do we see for QSPIX, MTUM and PRIMECAP?Ketawa wrote: ↑Thu Dec 07, 2017 12:47 pmYou are simply incorrect on Primecap's factor loadings. It is -0.1 to -0.2 in value loading, +0.1 to 0.2 in size loading, and basically indistinguishable from zero for momentum and quality, depending on the factor model you choose in Portfolio Visualizer.garlandwhizzer wrote: ↑Thu Dec 07, 2017 12:17 pm 1+
This is the whole point. Factor analysis alone does not accurately determine future performance. It's that simple.
Re: AQR, how can you make such definitive statements in light of the performance of QSPIX, which is pure factor investing?
QSPIX has higher loadings on all the juicy "drivers of return" (i.e. factors) except for size, yet over it's life has a 7.65% CAGR vs 15%-16% for the other funds which load on alpha. So if QSPIX is pure factor investing, what is explaining the returns?
OK, value didn't do well and MTUM and PRIMECAP with their negative value loadings benefited from that, but value should be accounted for in HmL-dev. What's the alpha -- random noise? Imprecision? A yet unexplained factor(s)?
https://www.portfoliovisualizer.com/fac ... sion=false
AMOMX vs MTUM and PRIMECAP shows a similar story.
What then do I conclude? MTUM and PRIMECAP don't seem explainable by factor analysis in this time period.
What factor(s) did well over the last 4 years that explains returns? It doesn't seem to be MOM. So growth stocks that don't exhibit MOM?
https://www.portfoliovisualizer.com/fac ... sion=false
Simply claiming that academic research shows that factor investing explains returns but that the stars must align at some future point in time for factor investing to explain real funds doesn't satisfy me. Sure, I am willing to accept that factors don't always pay a premium, but looking at AMOMX, MTUM, PRIMECAP and QSPIX, I can't really identify what factors have had good performance in the past 4 years.
I agree. Primecap's success has been consistent for 33 years so you can rule out luck. Coins don't flip heads consistently for 33 years. The other potential explanation as Ketwawa wrote, "the managers of the fund are onto something that doesn't show up on research." Ketawa is not convinced of that, but I am. Academic research does not come from a place of perfect and complete knowledge. Markets are more complex and unpredictable than current academic models project IMO. The claim that 90% of future returns can be explained by factors is IMO overstating the case. My point is that factors cannot be relied upon to accurately and consistently project future returns. Primecap's very impressive long term outperformance in spite of its totally unimpressive factor loads clearly demonstrates this.In response to my post about Primecap Fund, Ketawa wrote:
With only 130 stocks in large or mid caps, I'm not sure I would be convinced that the managers of the fund are on to something that has not shown up in research, or they simply had a lucky outcome
You can indeed rule out luck for Primecap's performance, depending on your threshold for luck. Among the entire universe of active funds, some would be expected to outperform by luck, especially if you are selecting from the universe of funds that have survived for 33 years.garlandwhizzer wrote: ↑Fri Dec 08, 2017 11:52 am I agree. Primecap's success has been consistent for 33 years so you can rule out luck. Coins don't flip heads consistently for 33 years. The other potential explanation as Ketwawa wrote, "the managers of the fund are onto something that doesn't show up on research." Ketawa is not convinced of that, but I am. Academic research does not come from a place of perfect and complete knowledge. Markets are more complex and unpredictable than current academic models project IMO. The claim that 90% of future returns can be explained by factors is IMO overstating the case. My point is that factors cannot be relied upon to accurately and consistently project future returns. Primecap's very impressive long term outperformance in spite of its totally unimpressive factor loads clearly demonstrates this.
Garland Whizzer