The Case for Contrarians: Why the Low Momentum Anomaly May Represent a Compelling Opportunity for Active Managers

  • Introduction: Is a Preponderance of Underperformers a Problem?
  • Momentum Seeking: We Wish We Were Traditional Quants (With Very Recent Hindsight)…
  • Pounding the Profitable: Can It Be a Perpetual Issue?
  • Conclusion: Another Fat Pitch in Low Momentum Stocks
  • Exhibits: Low and High Momentum Stocks in Kailash Small & Mid Cap Long and Short Portfolios
  • Appendix: A Note of Caution

Introduction: Is a Preponderance of Underperformers a Problem?

Since early 2018 our Small & Mid Cap portfolio has faced unusually fierce headwinds relative to the index. This underperformance is eerily similar to the pain experienced by our Large Cap portfolio in the first half of 2016. Kailash Capital responded to those dour days with our original paper Pain is the Parent of all Progress, The Case for Contrarians: Why the Low Momentum Anomaly Represents Active Management’s Greatest Opportunity in Nearly a Decade. In that work we highlighted that much of the underperformance came from our Large Cap portfolio’s unusually heavy weight in low momentum firms vs. high momentum firms.

Examining the Large Cap fundamentals of low momentum firms and comparing them to high momentum firms we concluded that rarely had the opportunities among low momentum firms appeared so compelling when contrasted with the fundamentals of high momentum firms. Post release of that paper, the Large Cap portfolio went from underperforming to outperforming as low momentum firms trounced their high momentum peers by 9.2% and nearly 14% over the next six and 12 months respectively. We believe the fundamentals in the Small & Mid Cap universe today point to a setup similar to what we saw in the Large Cap universe in June of 2016.

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Figure 1 shows that over the last 12 months the Small & Mid Cap portfolio has underperformed the market by 12.6%. Kailash Capital finds the situation all the more conspicuous since all of the pain has been inflicted in just the last six months. In an environment where investors have been convinced indexing is the solution, we recognize such performance can create meaningful career risk for many of our partners.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

  1. Click the following to read more about Are Energy Stocks Undervalued, Vanguard Small Cap Index Admiral, Define Small Cap Vs Large Cap


The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

September 16, 2018 |

Categories: White Papers

September 16, 2018

Categories: White Papers

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