Tuesday, April 23, 2024
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Does Momentum Investing Work on Funds?

Momentum investing is simply a strategy whereby you buy investments such as stocks that have performed well and sell the investments which have performed poorly. The idea behind it is that you catch trends when they are rising and are out when they are falling.

Sounds simple and exciting doesn’t it. But is it a case of what goes up must come down?

There are many ways of deciding when to enter the trend such as technical indicators including moving averages. In this test we are looking simply at reviewing the best performers on an annual basis in the hope that they will continue this in the next year.

To do the test we took the top 10 performers in 2015 and then assumed that we bought these in 2016, but sold them for 2017 if they weren’t in the top 10 during 2016. Of course this excludes transaction fees, which to switch from some funds could be significant.

In this test we have used Trustnet. Under the performance tab you can see the % return for each of the last 5 years. For this test we have looked at ETFs, Investment Trusts, IA Unit Trusts & OEICs (open-ended investment company) & Exchange Traded Funds . These cover most of the major types of Investment Funds available.

The figures on performance on Trustnet includes dividends. “Performance figures are shown in Pound Sterling (GBP) unless otherwise specified. Total return performance figures are calculated on a bid price to bid price basis (mid to mid where applicable) with net income (dividends) reinvested. Ratios are calculated on a monthly return basis, figures are annualised and the fund’s sector average is used as a benchmark where applicable.”


IT = Investment Trust, UT/OEIC = Unit Trusts & Open-ended Investment Companies, ETF = Exchange Traded Funds, FTSE 100 = HSBC FTSE 100 UCITS ETF, S&P 500 = iShares Core S&P 500

When comparing strategies it’s always important to compare them to the buy and hold strategy of Index Tracker Funds such as the FTSE 100 & S&P500. It’s important to note that these were included in the ETF calculations, however they never featured in the top 10 so were never included.

The results are perhaps quite staggering. The straight out buy and hold strategies massively outperformed all 3 of the other momentum strategies.

The switching of the ETFs actually showed negative results. The funds that made the top 10 included aggressive leveraged funds such as the ‘Direxion Daily Emerging Markets Bull 3X Shares’ and ‘ProShares UltraShort MSCI Brazil’. Funds like these can be extremely volatile so you can make a lot, but also lose a lot.

The Unit Trusts & Open-ended Investment Companies performed reasonably well with 5.53% growth, but if you throw in any fees for switching the funds, this doesn’t really stack up too well.

For the Investment trusts we used only incorporated the mainstream ones and results were poor too at 1.79%.

In summary our findings can’t be taken as final, this is only over a 4 year period. However it is hard to see how any of these momentum investing strategies given the added costs could actually outperform the buy and hold strategy. There are ofcourse other momentum strategies and we will be testing some of these in the near future.

As a follow up to this post we did a Reverse Momentum Investment Strategy Test also known as mean reversion. The results are remarkable.