latames

Momentum factor

Stocks tend to maintain recent price trends in the future, and the momentum strategy takes advantage of this phenomenon. When using a momentum strategy, it is important to be aware of the risk of trend reversals and of how that risk can be mitigated.

The momentum premium is one of the largest factor premiums, but it is hard to capture because of two practical problems. First, a substantial drawdown can occur if there is a trend break like a market reversal, as the strategy will select equities with high market sensitivity in a bull market. Second, the group of stocks with the strongest trends changes all the time, causing high turnover in the portfolio. The transaction costs that this turnover generates eat into the momentum premium.

Figure: Improved risk-return ratio with Robeco's Momentum factor approach
Source: Robeco, Quantitative Research, 2014.

Unlike ‘traditional’ momentum based on total returns, Robeco calculates ‘residual’ momentum, adjusted for market risk in particular. This avoids the unrewarded risks of a traditional momentum strategy. Furthermore, smart portfolio construction rules ensure only necessary trades are done and transaction costs are minimised.

Quantitative investing: invisible layers surface to deliver attractive returns
Quantitative investing: invisible layers surface to deliver attractive returns
Read more
Is swapping a good alternative to divesting?
Is swapping a good alternative to divesting?
Similar to divestment, swapping is a way to establish zero economic exposure to excluded firms.
19-01-2023 | Visión
‘The talent in an investment team makes the difference’
‘The talent in an investment team makes the difference’
Assessing the quality of people and their investment skill is crucial to the manager selection process.
16-01-2023 | Entrevista
‘The scope for portfolio customization is really wide’
‘The scope for portfolio customization is really wide’
The Robeco Quant Equities team uses its Quant Customizer to develop customized portfolios in cooperation with our clients.
12-01-2023 | Entrevista