hongkongen
What’s up with Momentum?

What’s up with Momentum?

04-02-2021 | Insight
Momentum had its ‘shot of momentum’ in 2020. But the ride was a bumpy one, while we also saw large return dispersions between different Momentum approaches. In this article, we examine the drivers behind the strong performance delivered by Momentum, how the factor can at times be exposed to significant style and concentration risks, and why we believe a well-diversified portfolio approach across Momentum signals is prudent to mitigate these risks.
  • Guido  Baltussen
    Guido
    Baltussen
    Head of Factor Investing
  • Simon Lansdorp
    Simon
    Lansdorp
    Portfolio Manager
  • Milan Vidojevic
    Milan
    Vidojevic
    Researcher

Speed read

  • Momentum factor performance was strong in 2020
  • However, return dispersion between Momentum strategies was large
  • A well-diversified portfolio approach across Momentum signals helps mitigate style and concentration risks

Momentum was one of the top-performing factors in 2020. Indeed, the MSCI ACWI Momentum Index did not only significantly beat the MSCI ACWI, but it also outperformed most factor indices. It benefited from its material exposure to mega-cap growth stocks, in particular its large allocation to ‘big tech’. To this end, the MSCI ACWI Momentum and MSCI ACWI Growth Indices had material overweight exposures to seven of the ten largest stocks in the MSCI ACWI: namely Apple, Microsoft Corporation, Amazon, Tesla, Taiwan Semiconductor Manufacturing Company, Alibaba Group Holding and Tencent.1

‘It was not all smooth sailing as the factor navigated an uneven performance path in 2020’

That said, it was not all smooth sailing as the factor navigated an uneven performance path in 2020. Its ride was punctuated by bumpy occasions during periods of strong reversals characterized by growth stocks retreating. From mid-May until early June, during the first half of September, and – most recently – since 9 November 2020, growth stocks lagged the market, significantly reducing the MSCI ACWI Momentum Index’s year-to-date outperformance during those intervals.

In fact, the most evident indication of a value-growth rotation occurred after the announcement of positive phase III clinical trial results for the Pfizer-BioNTech vaccine-candidate in November. Given its heavy tilt towards large-cap growth equities and underweight exposure to smaller-cap value stocks, the MSCI ACWI Momentum Index was severely affected by the news and the subsequent rally of the value factor. Despite that, the style capped off the year as one of the top-performing factors in 2020.

Quite interestingly, we also observed large return dispersions between different momentum strategies over the period. The results are illustrated in Figure 1, where the blue bars depict the 2020 portfolio returns of various momentum signals relative to their long-term expectations.2 The chart shows that the price momentum factor had an outstanding year, exceeding not only its own long-term average, but also outperforming all the other momentum signals.

Figure 1 | 2020 and long-term performance of Momentum signals in excess of the market

Source: Robeco, FactSet as at November 2020. Figure shows annualized average returns of portfolios constructed based on price momentum, residual momentum, analyst revisions, residual analyst revisions and news sentiment. The investment universe consists of constituents of the MSCI ACWI augmented with large and liquid constituents of the FTSE World Developed, the S&P Broad Market, and the IFC Investable Emerging Markets Index. Portfolios are constructed by investing in securities ranked in the top 20% of the respective signal and they are rebalanced monthly. Combination portfolio is based on the combined ranked where the signals are equal-weighted. Long-term average returns based on the 1986-2020 sample period (2001-2020 for news sentiment).
The picture, however, is a bit different when viewed from a longer-term perspective. Figure 2 shows the calendar-year returns of price momentum and an equal-weighted combination of momentum signals based on a historical sample. The graph reveals that a combined approach delivers higher average returns, and, importantly, also provides a much smoother ride compared to the traditional price momentum factor. The most notable performance gaps took place around significant momentum peaks (e.g. height of dot-com bubble) and momentum drawdowns (e.g. such as 2009).

Figure 2 | Calendar-year returns of Price Momentum and a combination of five Momentum signals

Source: Robeco, FactSet as at November 2020. Figure shows calendar-year returns of portfolios constructed based on price momentum and a combination of price momentum, residual momentum, analyst revisions, residual analyst revisions and news sentiment. The investment universe consists of constituents of the MSCI ACWI augmented with large and liquid constituents of the FTSE World Developed, the S&P Broad Market, and the IFC Investable Emerging Markets Index. Portfolios are constructed by investing in securities ranked in the top 20% of the respective signal and they are reformed monthly.

Apart from the diversification benefits derived from combining different momentum signals, the risk reduction observed stemmed from avoiding large style bets, that typically accompany traditional price momentum. These bets are, on average, unrewarded, and nearly half of the total volatility associated with traditional price momentum strategies can be attributed to them.3

Portfolio construction parameters are another source of significant return dispersion between different momentum approaches. Most notably is the allocation to mega and large-cap stocks versus smaller-cap counterparts. Several studies show that momentum is stronger in mid- to smaller-cap equities. The efficacy of the factor is reinforced by tilting it towards smaller stocks.4

Momentum can, at times, be exposed to significant style and concentration risks. Its current exposure to large-cap growth stocks that trade at lofty valuations is a good example. We believe that a well-diversified portfolio approach across momentum signals is prudent. It avoids concentrated positions and is less affected by the dynamic tilts that traditional price momentum can adopt to other factors, thereby mitigating those risks.

In our view, combining momentum with other factors has been and continues to be an effective way to improve long-term investment outcomes. Although such choices can result in headwinds at times, we believe that being cognizant of momentum’s properties, and taking them into account when designing a momentum or a multi-factor strategy, leads to better performance in the long term.

1Source: MSCI. Data as of 30 November 2020.
2The long-term historical premiums for the five momentum signals are of similar magnitude. Because the signals are not perfectly correlated, the combination results in a stronger and more robust return than any single measure.
3See amongst others: Blitz, D.C., Huij, J. and Martens, M, 2011, “Residual Momentum”, Journal of Empirical Finance.
4More generally, factor premiums manifest themselves more strongly in the mid- and small-cap segments of the market. We discuss these insights in our paper: Blitz, D.C., Lansdorp, S., Roscovan, V. and Vidojevic, M., 2019 “Factor strategies need breadth”, Robeco article. Available upon request.

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.

Logo

Disclaimers

1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is to be accessed by “professional investors” only (as defined in the Securities and Futures Ordinance (Cap.571) and/or the Securities and Futures (Professional Investors) Rules (Cap.571D) under the laws of Hong Kong). The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click the “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree