Low Momentum Anomaly: The Fattest Pitch in History

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 Long and Short Portfolios

“A recent paper by Morningstar noted that Active US Equity Funds had suffered nearly $180 billion in redemptions while their passive peers took in nearly $110 billion in funds over a period of one year.¹ While the relentless flow of funds from active to passive strategies has investor money effectively mindlessly chasing performance, we believe the situation has never been less conducive to such an investment approach and the future holds great promise for disciplined active investors.” – Kailash

Introduction: Is A Preponderance of Underperformers a Problem?

Since the end of 2015, the Large Cap portfolio has faced a fair number of trials and tribulations relative to the index with excess returns experiencing what we consider a remarkably painful set of circumstances over the course of the last few months. Figure 1 shows the portfolio’s return since inception and you can see the sharp drop-off in relative performance in the most recent month of June. As can be seen in Figure 2, in June the model underperformed the market by 2.26%. Considering the annual expected tracking error of the portfolio is roughly 5.5%, June represented a near 2 standard deviation event in just one month. Our analysis indicates that the primary cause of these sharp drawdowns is our penchant for firms that are making money and treating shareholders well which has been, at least in recent months, one of the worst possible things a firm could do. While we admit to being utterly flummoxed by the proliferation of bonds that guarantee losses we are equally confused by the rising investor preference for firms that lose money and dilute shareholders over those that earn money and pay shareholders to own them (for more on this please see our work: A Rare Opportunity in Top Shareholder Yields).

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SERVICES

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.
Kailash Capital Research, LLC ’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.

Disclaimer

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 Research, LLC and its affiliates (collectively, “Kailash Capital Research, LLC ”) 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 Research, LLC . In preparing the information, data, analyses, and opinions presented herein, Kailash Capital Research, LLC has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital Research, LLC , however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital Research, LLC 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 Research, LLC – All rights reserved.

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