Can Momentum Investing Be Saved?

27 Pages Posted: 16 Jan 2018

See all articles by Robert D. Arnott

Robert D. Arnott

Research Affiliates, LLC

Vitali Kalesnik

Research Affiliates Global Advisors

Engin Kose

affiliation not provided to SSRN

Lillian J. Wu

Research Affiliates, LLC

Date Written: October 14, 2017

Abstract

On paper, momentum is one of the most compelling factors: simulated portfolios based on momentum add remarkable value, in most time periods and in most asset classes, all over the world. So, our title may seem unduly provocative. However, live results for mutual funds that take on a momentum factor loading are surprisingly weak. No US-benchmarked mutual fund with “momentum” in its name has cumulatively outperformed its benchmark since inception, net of fees and expenses. Worse, because the standard momentum factor gave up so much ground in the last momentum crash of 2008–2009, it remains underwater in the United States, not only compared to its 2007 peak, but even relative to its 1999 performance peak. This means 18 years with no alpha, before subtracting trading costs and fees!

To be sure, most advocates of momentum investing will disavow the standard model, and will claim they use proprietary momentum strategies with better simulated, and perhaps better live, performance. A handful (especially in the hedge fund community) may be able to point to respectable fund performance, net of trading costs and fees. But a careful review of the competitive landscape reveals that most claims of the merits of momentum investing are not supported by data, particularly not live mutual fund results, net of trading costs and fees.

The three traps for momentum investing are 1) high turnover, in crowded trades, which leads to high trading costs; 2) a careless sell discipline, because momentum’s profits accrue for months, not years, and then reverse course; and 3) repeat winners (and losers), which have been soaring (or tumbling) for so very long they enjoy little or no momentum follow-through. Each of these traps can be avoided. By evading these traps, we can narrow the gap between paper and live results. Yes, momentum can probably be saved, even net of fees and trading costs.

This is the fourth and final article in the Alice in Factorland series.

Keywords: momentum, asset allocation, mutual funds, momentum investing

JEL Classification: G00, G10, G11

Suggested Citation

Arnott, Robert D. and Kalesnik, Vitali and Kose, Engin and Wu, Lillian J., Can Momentum Investing Be Saved? (October 14, 2017). Available at SSRN: https://ssrn.com/abstract=3099687 or http://dx.doi.org/10.2139/ssrn.3099687

Robert D. Arnott

Research Affiliates, LLC ( email )

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HOME PAGE: http://www.researchaffiliates.com/Our%20Firm/Our%20Team/Pages/Rob-Arnott.aspx

Vitali Kalesnik (Contact Author)

Research Affiliates Global Advisors ( email )

16 Berkeley Street
London, W1J 8DZ
United Kingdom
+44 2039299880 (Phone)

HOME PAGE: http://https://www.researchaffiliates.com/en_us/home.html

Engin Kose

affiliation not provided to SSRN

Lillian J. Wu

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

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