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Beating the market with momentum investing

uying a stock for no oth- table, over the last three years,
er reason than because MTUM has returned 16.35% a Outperformance of selected momentum
it is rising. Holding on year in the last three years ended
for dear life, hoping to December 2017. This represents ETFs against respective benchmarks
exit with a profit before a significant outperformance TIME FRAME MOMENTUM ETF AND BENCHMARK INDEX OUTPERFORMANCE
prices come back down to earth. over its parent index, the MSCI (PER ANNUM) (PER ANNUM) BENCHMARK (PER ANNUM)
Sounds reckless? Welcome to the USA Stock Index, which has re-
Past 3 years ended MTUM (iShares Edge MSCI USA MSCI USA
world of momentum investing. turned 11.29% a year over the
December 2017 Momentum Factor ETF) Stock Index
Momentum investing goes same period.
+16.35% +11.29% +5.06%
against the instincts of most in- Outside of the US stock mar-
vestors (“buy low, sell high”) and ket, we may consider two ETFs Past 12 months ended IMTM (iShares Edge MSCI MSCI World
replaces it with a dare: “buy high, with slightly different takes on a December 2017 International Momentum ex USA
sell higher”. Despite its seemingly B Y H E R B E R T L I A N momentum strategy, also shown Factor ETF) Stock Index
counter-intuitive nature, the po- in Chart 1. IMTM (the iShares +25.50% +24.81% +0.69%
tential benefits of momentum in- Edge MSCI International Mo- Past 12 months ended IMOM (MomentumShares
vesting are well established in academic liter- mentum Factor ETF) is the international coun- December 2017 International Quantitative MSCI EAFE
ature, and could help your portfolio perform terpart to MTUM. In 2017, it returned 25.50%, Momentum ETF) Stock Index
better than the market average in the long run. against 24.81% for the MSCI World Ex USA In- +33.16% +25.03% +8.13%
Momentum works on a simple observation: dex — that is to say, it barely outperformed. Time frames were selected based on longest available time frames
stocks that are rising in price tend to keep on IMOM (the MomentumShares International comparable between ETF and benchmark factsheets
rising, and those that are falling tend to con- Quantitative Momentum ETF) uses a more in-
tinue in the same direction. Jegadeesh and volved selection process that takes into account MSCI, ETF PROVIDER FACTSHEETS ENDED DECEMBER 2017.

Titman established this for the US market in not only momentum but also other factors that
their 1993 paper “Returns to Buying Winners may indicate whether a stock may outperform.
and Selling Losers: Implications for Market Ef- It has returned a whopping 33.16% over the
ficiency”. In it, they showed that buying stocks past year, against 25.03% for its benchmark
that had been rising for three to 12 months, MSCI EAFE Index.
as well as selling stocks falling over the same Taken as a whole, these results suggest that
time horizon, was a profitable trading strategy it is not inconceivable for momentum invest-
over the 1965-to-1989 period. Rowenhorst gen- ing to outperform in real life net of trading
eralised this to European markets from 1980 costs. However, one to three years is a very
to 1995 in his 1998 paper, “International Mo- short time frame to judge the success or fail-
mentum Strategies”, and many other studies ure of a particular strategy. Performance also
have since confirmed that momentum effects varies significantly across ETFs even if they
do exist in equity markets in general. all purport to trade on momentum, because
The studies suggest that a portfolio that each provider’s stock selection process is dif-
systematically holds stocks exhibiting posi- ferent. Each ETF will perform better at differ-
tive price momentum should be expected to ent times, and a “best solution” has not been
beat the market average return. The problem proven to exist.
is that momentum lasts for only a short time, In fact, what may not be obvious is that mo- MSCI, YAHOO FINANCE, AUTHOR’S CALCULATIONS

which means that, in reality, any portfolio try- mentum itself tends to be cyclical and should
ing to take advantage of this effect is going to be expected to underperform the market for Feb 1, 2016 to Feb 1, 2017, you would have reveal itself over long periods of time. It has
incur high trading costs, as each component significant periods of time. This is clear from been quite disappointed as you trailed the in- to be that way — by definition, it is impos-
is likely to be switched out within less than a the chart, which shows the trailing one-year dex by about 9% (although if you held on, you sible for everyone to outperform the mar-
year. Can a momentum strategy be profitable outperformance of MTUM against its bench- would have then made back your money and ket average all the time. If you are present-
in real life, even after such trading costs are mark MSCI USA index, since its inception in more in the following months in 2017, which ed with a strategy that claims to do so, put
taken into account? April 2013 to the present. Data points above was a great year for momentum in general). the momentum into your feet and run away
To answer this question, let us consider three the zero line show that MTUM had outper- What all this says is that we should be as quickly as you can. E

momentum exchange-traded funds and compare formed its index in the preceding 12 months, open to having a small exposure to momen-
their performance against that of their standard and those below the zero line denote under- tum strategies in our portfolio as long as Herbert Lian is a financial adviser at IPP ­Financial
capitalisation-weighted market benchmarks. performance. Since the line spends signifi- costs are not too high. But we need to di- Advisers Pte Ltd. The views expressed here are
MTUM (the iShares Edge MSCI USA Momen- cant portions of the time below zero, this im- versify and set our expectations correctly. solely those of the author in his private capac-
tum Factor ETF) selects US stocks exhibiting plies that there are also significant periods of Such an exposure may well do better than ity. This article should not be regarded as pro-
positive price momentum at the 12- and six- underperformance more than a year long. In the market average, but outperformance will fessional investment advice or as a recommen-
month time horizons. As can be seen from the particular, if you had invested in MTUM from be unpredictable in the short term and only dation regarding any particular investment.


Top 5 gainers over the week

CURRENCY ($ MIL) (%) (%) (%) (%) (%) RATIO (%)
db x-trackers S&P 500 Inverse Daily UCITS ETF Equity US USD 15.63 387 8.3 0.6 -19.3 -11.9 -12.7 0.50
United SSE 50 China ETF Equity China SGD 2.72 35 1.9 9.7 28.9 8.1 6.8 4.43
SPDR Gold Shares Commodity Global USD 127.09 46,747 0.8 2.1 2.1 0.6 -3.5 0.40
iShares J.P. Morgan USD Asia Credit Bond Index ETF Fixed Income Asian Pacific Region SGD 14.09 53 0.3 -1.6 -2.5 3.4 5.6 0.27
iShares Barclays USD Asia High Yield Bond Index ETF Fixed Income Asian Pacific Region SGD 14.18 96 0.2 -1.9 -3.0 6.2 7.3 0.44

Top 5 losers over the week

CURRENCY ($ MIL) (%) (%) (%) (%) (%) RATIO (%)
db x-trackers FTSE Vietnam UCITS ETF Equity Vietnam USD 33.45 456 -9.5 -0.2 36.2 8.1 5.4 0.85
Lyxor MSCI Emerging Markets UCITS ETF Equity Global USD 12.93 2,921 -8.1 -0.2 21.6 7.4 5.1 0.55
SPDR Dow Jones Industrial Average ETF Trust Equity US USD 241.26 29,943 -8.1 -4.4 15.1 12.2 NA 0.18
Lyxor Dow Jones Industrial Average UCITS ETF Equity US USD 24.06 358 -7.8 -4.5 14.5 11.5 14.8 0.50
db x-trackers MSCI China TRN Index UCITS ETF DR Equity China USD 19.79 1,069 -7.3 2.1 38.5 11.4 10.8 0.65
Notes: Returns as at Feb 6 and in Singapore dollar terms; total assets based on latest available data; three- and five-year returns are annualised