An investor who bought the FTSE 100 at its peak in 2007 would now be just about back where he or she started, assuming no charges and ignoring dividend payments. Compare that with the very basic, quarterly, blue-chip momentum strategy I've charted over the same period which, following a storming start to 2014, has delivered a capital return of slightly more than 100 per cent over the same period.
Admittedly, these momentum returns are theoretical. Indeed, share price performance is measured on a mid price-to-mid basis and ignores all charges, which is particularly fanciful given the high-turnover nature of the strategy. Nevertheless, the performance (see graph) illustrates what a powerful factor momentum can be on investment returns.
The volatility of the most recent three-month period has played to the strategy's strength with the 10 long momentum picks for December (consisting of the 10 fastest-rising shares of the previous three months) delivering a superb combined capital return of 15.1 per cent compared with 4.2 per cent from the blue-chip index.
SHARE-PRICE PERFORMANCE (15/12/13 to 3/03/14)
Longs | Performance | Shorts | Performance |
---|---|---|---|
Hargreaves Lansdown | 8.70% | Fresnillo | 32.6% |
Associated British Foods | 33.6% | RSA Insurance | 5.1% |
Aberdeen Asset Management | -14.4% | Tullow Oil | -4.8% |
Int'l Consolidated Airlines | 16.5% | Anglo American | 20.6% |
easyJet | 16.8% | Centrica | -1.3% |
Whitbread | 28.2% | Petrofac | 19.2% |
AstraZeneca | 16.1% | Coca-Cola HBC AG | -7.8% |
Shire | 22.3% | Mondi | 20.7% |
Prudential | 6.80% | SSE | 5.4% |
TUI Travel | 16.6% | Standard Chartered | -2.5% |
Average | 15.1% | Average | 8.7% |
FTSE 100 | 4.20% | - | - |
Source: ShareScope & S&P Capital IQ
While our short portfolio (made up of the 10 worst-performing shares of the previous three months) continues to underperform the FTSE 100 from the 2007 peak, the most recent three months have seen it seriously outperform (it should underperform so outperformance is actually the opposite to what is wanted). A strong swing in sentiment towards resources stocks was the major contributor to the latest three-month performance.
From this magazine's perspective, some consolation for the poor performance of the shorts can be garnered from the fact that during the three months under review the IC recommended readers buy shares in two of the strongest-performing blue-chip resources 'momentum shorts' - Anglo American, Takeover Tip of the Year, 1,275p, 2 Jan 2014 & Fresnillo, buy, 672p, 16 Jan 2014 (since moved to hold). And consolation can also be taken from the fact that the shorts' 8.7 per cent gain was substantially less than that achieved by the longs.
The shorts for this quarter can be seen in the table that follows my brief write-up of the 10 stocks that make it into the long portfolio. (Please note, the portfolios may change when the portfolio performance is next updated as the period monitored only runs to 5 March rather than the true end date of 15 March, which is in order to fit with publication deadlines.)
The longs