We tested momentum investing on funds and the results were not as good as expected at all. The simple strategy seems to be profitable, but underperforms a long term ‘buy and hold’ strategy. So we decided to try the opposite.
You could say this is a value investing strategy, but strictly speaking it’s not. Although the fund or investment company might be of value, eg the share portfolio has a low price earnings ratio or the investment company is trading at a discount to it’s Net Asset Value, this isn’t necessarily the case.
In this test we buy the worst performing funds and companies of the year and hold them for another. Once again we used Trustnet.
To do the test we took the bottom 10 performers in 2015 and then assumed that we bought these in 2016, but sold them for 2017 if they weren’t in the bottom 10 during 2016. Of course this excludes transaction fees, which to switch from some funds could be significant.
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.”
|Year||IT||UT/OEIC||ETF||FTSE 100||S&P 500|
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
This time the results are even more remarkable. Both the Investment Trusts & the UT/OEICS easily outperformed the FTSE 100 and the ETFs did too. Although the ETFs did fall behind the S&P 500.
A potential fault with the calculations are that if one of the funds in question had been shut down they may not be listed on Trustnet at all. So we might have had a poor performing fund which we would have invested in and which completely disappeared. Hence avoiding our calculations. Sometimes funds do close down if they are not getting enough investment in or the performance has been poor. However, in the majority of fund closures, investors will have the option to get cash or rollover to invest in another fund. There have been cases when things have gone really wrong, but they are rare. One example of this was in 2019 with the Woodford Fund, but as of writing many investors are getting money back and the fund is still listed under LF Equity income. Funds are generally far less risky because of diversification. They would only go to zero if all of there investments did, not just one company. And if the Fund management company goes bust, then your funds should be protected because they are not held in the same bank account.
In summary our findings can’t be taken as final, this is only over a 4 year period. However, we think this is a really exciting find. It’s a great initial point for an investment strategy and with further research and refinement could be very profitable.