Factor Momentum

Chasing Factor Performance

August 2018. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

• The Momentum strategy can be applied to stocks, sectors, countries and factors
• Factor momentum shows positive excess returns across regions
• However, single-stock Momentum performance is comparable and less complex to implement

INTRODUCTION

We recently investigated applying the long-short Momentum strategy to sectors and countries in Europe, which revealed positive excess returns (“Sector versus Country Momentum“). Effectively, this simply means that performance chasing works, at least if implemented systematically. In addition to allocating to the best performing sectors or countries, investors also tend to chase the best performing investment strategies like Value or Growth. In this short research note we will investigate the application of the long-short Momentum strategy to factors, which we refer to as factor momentum.

METHODOLOGY

We focus on the Momentum strategy, which is defined as buying the winning and selling the losing factors, as measured by their performance over the last 12 months, excluding the most recent month (read Momentum Variations). The strategy is applied to a universe of 25 factors in the US, Europe and Japan. The factors can be broadly categorised into Value, Quality, Size, Growth and price-based metrics. The factor performance is calculated by creating beta-neutral long-short portfolios that select the top and bottom 10% of each stock market ranked by each factor. Only companies with a market capitalisation of larger than $1 billion are included. The portfolios are rebalanced monthly and each transaction incurs costs of 10 basis points. The graphic below summaries the factor universe.