Category: Investing Insight

Investing insight to make you a better investor.

Cliff Asness on Momentum Investing

In a wide ranging interview with Tyler Cowen, Cliff Asness discussed momentum and value investing strategies, disagreeing with Eugene Fama, the economics of Ayn Rand, bubble logic etc. The first half of the conversation was mostly about momentum investing and how it works.

Excepts on momentum:

Intro
A momentum investing strategy is the rather insane proposition that you can buy a portfolio of what’s been going up for the last 6 to 12 months, sell a portfolio of what’s been going down for the last 6 to 12 months, and you beat the market. Unfortunately for sanity, that seems to be true.

To some, it’s very intuitive. Just buy what’s going up.

Drawdowns
It has horrible streaks within that of not working. If your car worked like this, you’d fire your mechanic, if it worked like I use that word. I think it is harder than you might guess, even if something works long term, to have it go away because a lot of investors can’t live through the bad periods. They decide why it’s never going to work again at the wrong time.

Why it works
Underreation: News comes out. Price moves but not all the way. People update their priors but not fully efficiently. Therefore, just observing the price move is not going to move the same amount again but there’s some statistical tendency to continue.

Overreaction: People in fact do chase prices.

How to make it work
If you’re going to be momentum, you’ve got to really do it. You’ve got to be disciplined. You’ve got to come in every day, and you’ve got to count on these under- and overreaction things.

Momentum strategies on StockViz

We have been offering the Momentum Theme for more than two years now. It implements a relative momentum strategy where you compare the strengths of a universe of stocks to each other. 2014 returns were +90% and +36% so far this year (Compare.)

This year, we have introduced Velocity – an absolute momentum strategy – and Acceleration – a strategy that tracks changes in momentum.

If you are interested in momentum investing, please get in touch with us!

 
Source: A Conversation with Cliff Asness
Related: Small Cap Momentum Style Fund

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Equity Returns at the Turn of the Month

The Turn of the Month Effect

A recent paper in the Financial Analysts Journal looks at the Turn of the Month effect on equities. Equity Returns at the Turn of the Month, John J. McConnell and Wei Xu:

The turn-of-the-month effect in U.S. equities is found to be so powerful in the 1926–2005 period that, on average, investors received no reward for bearing market risk except at turns of the month. The effect is not confined to small-capitalization or low-price stocks, to calendar year-ends or quarter ends, or to the United States: This study finds that it occurs in 31 of the 35 countries examined. Furthermore, it is not caused by month-end buying pressure as measured by trading volume or net flows to equity funds. This persistent peculiarity in returns remains a puzzle in search of an answer.

Does it apply to Indian markets?

The study skips over the Indian markets. So we did a quick test on the CNX 100 index to check if the effect holds. Here’s the cumulative return chart between a Buy-and-Hold CNX 100 strategy (B&H, black) and a Turn-of-the-Month CNX 100 strategy (TOM, red):

CNX100.TOM

Although the TOM strategy has lower-drawdowns, the B&H wins – both in terms of tax advantage and trading costs. The Turn-of-the-Month effect doesn’t seem to apply to Indian equities.

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Diwali Stock Picks: Doodh ya Paani?

Mostly Paani.

Back in October last year, we created two Themes to track the Diwali stock picks collated by ET and Kotak. ET had written that the 10 stocks that they assembled from the recommendations of four brokers could double by next Diwali.

However, between 2014-10-21 and 2015-11-02, ET Diwali Picks 2014 returned a cumulative 2.50% (IRR of 2.41%) vs. CNX Midcap’s cumulative return of 17.60% (16.10%.) While Kotak Diwali Picks 2014 has returned a cumulative 14.60% (14.11%.) (ET Picks, Kotak Picks)

ET has once again put out stock picks for this Diwali. You can track the portfolio here: Diwali Picks ET 2015

Better luck this year!

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Should You Buy What Mutual Funds Buy?

No.

Mutual fund conviction buys

Every month, mutual funds disclose their portfolios and investors go to work on them to find investment ideas. But should they? Tracking their conviction buys – stocks that are new additions to their portfolios – tell a different story.

mf.new.additions

Median T+5, T+10 and T+20 returns were -0.13%, -0.93% and -1.3%

You were actually worse off following them if you were looking for a quick trade.

Does this mean fund managers miss the mark?

No. Their reason for buying a stock makes sense for the strategy and portfolio that they are running. Their time horizon extends beyond 20-days. Using their actions to guide your trading decisions is what misses the mark.

How is this data useful?

This is basically a negative result. The next time some fund manager is asked what he is buying on TV or you come across a media item that lists the most bought stocks, curb your instinct to go out and buy them.

If you really like what a fund manager is doing with his portfolio, it is cheaper to buy his fund rather than trying to do it yourself.

Related:
Mutual Fund Exposure of Stocks
Mutual Fund Portfolio Disclosures

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Mutual Fund Exposure of Stocks

Know thy enemy

Mutual fund asset managers face a lot of ‘career risk’ if they make an unpopular bet and are proven wrong. They end up following the herd in selling on the face of bad news so it pays to keep an eye on the how much exposure funds have to a specific stock. If no mutual fund owns it then you could make a “deep value” case for an undiscovered gem. If a lot of funds own it, then it is probably a momentum play.

However, be vary of outsourcing your investment decisions. For instance, Canara Robeco Emerging Equities’ exposure to DCB Bank stood at 1.86% as per September’s portfolio disclosure – it was a new addition. The stock is down ~40% since it announced an ambitious expansion plan in October.

Fund Exposure on StockViz

The ‘Analysis’ section on the equity page gives a 6-month ownership history of a specific stock. For example, this is how it looks for DCB Bank:

dcb bank

Play around and let us know if you have any suggestions!

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