- Introduction: The vicissitudes and vagaries of value and momentum strategies; evaluating when strategies underperform
- Drawdowns: Value drawdowns are slow with violent snap-backs; momentum declines are rapid with slow recoveries
- Characteristics of Recoveries: Drawdowns in value tend to be precursors to countercyclical movements compared with the market; momentum drawdowns tend to recover in a highly pro-cyclical manner
- Frequency & Reliability: Drawdowns in value tend to be infrequent and have always recovered; drawdowns in momentum are more frequent and have not always resolved themselves
- Conclusions: The tortoise and the hare; value and momentum strategies leave you frustrated in their own ways
- Where We Are Today: Active drawdowns and their constituents
Introduction: The vicissitudes and vagaries of value and momentum strategies
Clients have lamented—in recent quarters—the lack of market direction since the S&P first touched 2,000 in July 2014. This concern gets expressed in a number of ways via questions about sector performance, energy or declining economic growth that often ending with the more basic query, “what exactly is working anyway?” Using the Kailash data set, we tested value and momentum strategies in an attempt to understand periods of underperformance and implications for today’s market environment.
Over that time frame since 2014 we have noticed the Kailash Large and Small & Mid Cap portfolios have an increasingly value-oriented tilt. Stocks with traditional value characteristics have moved up in the rankings. However, in the Large Cap stock space, the market appears to be schizophrenic; high momentum “story” stocks either stand still or rise while firms deemed “cyclical” continue to price in a stock apocalypse, trading lower despite rising profits. This value/momentum/Kailash ranking divergence has been a primary contributor to the Kailash Large Cap portfolio’s 1.6% underperformance YTD. The opposite phenomenon is occurring in the Small & Mid Cap portfolio where we have noticed that cracks emerged in the high momentum space. High fliers have suffered severe headwinds. The tribulations of these high momentum story stocks—and our value pivot—have been meaningful contributors to the Baird’s SMID portfolio’s 1.9% outperformance YTD.
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June 30, 2016 |
| Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin
June 30, 2016
Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin