Category: Investing Insight

Investing insight to make you a better investor.

Residual Momentum

The conventional way of implementing momentum strategies rank either relative or absolute time series returns of a universe of stocks. If either market beta, value or the small-cap premium had a big hand in driving equity returns during the formation period, then the momentum portfolio will be overweight those factors. This leads to steep momentum crashes, or so the theory goes.

In their paper on Residual Momentum, Blitz, Huij and Martens propose ranking stocks based on the residuals obtained after fitting their return series to the Fama-French Three factor model. They argue that a portfolio created this way outperforms vanilla momentum strategies.

We have created an automated residual momentum strategy, Momo (Residual) v1.0, that implements the residual momentum strategy outlined in the paper.

Categories , Tags ,

Are stocks an inflation hedge?

Is there a relationship between inflation and stock returns in India? A recent study that looked at monthly data between 1994 and 2014 shows that there is no significant pro-cyclical inter-dependency between inflation and stock returns.

However, the paper does not present the results of any statistical significance tests. This leaves the reader at the mercy of trying to interpret pretty pictures of wavelet transforms.

On the Dynamics of Inflation-Stock Returns in India

Categories , Tags ,

State of PMS – November 2016

As of November this year, there are about 170 SEBI registered Portfolio Management Service providers. Until recently, their performance data was not widely available. Thanks to continued pressure from publications like MoneyLife and others, SEBI has finally published PMS details on its website. We plan to download that data and publish two key pieces of information every month:

  1. Performance diffusion – what is the range of performance put in by various PMSs.
  2. Cumulative performance – how do different PMSs compare with their cheaper mutual fund counterparts.

Monthly Performance Diffusion

On an average, there is no great benefit to investing in a PMS vs. a mutual fund. The numbers here do not include performance management fees, profit share and brokerage of PMS whereas mutual fund NAV includes everything. Plus, gains from PMSs are taxed as if it were the investor’s own trading account – with the full impact of churn – whereas mutual funds do not attract capital gains tax if held for more than a year.

pms-monthly

Cumulative Returns

What if an investor just held onto a mutual fund instead of going through a PMS?

pms-mutualfund

On an average, a PMS is unlikely to beat a large-cap mutual fund after fees and taxes.

Hopefully, SEBI keeps the performance updates going on its website. With results like this, PMSs will have a strong incentive to defy SEBI’s data collection programs. Fingers crossed!

Categories , Tags