My blue-chip momentum portfolio suffered a dud quarter in the three months to 15 June. Indeed, following a storming start to the year, the 10 'long' momentum picks dropped -3.7 per cent over the period, compared with a 3.8 per cent gain from the market. What is more, the 10 'short' momentum stocks, which are meant to perform badly, also substantially outperformed the longs, rising by 3.7 per cent. That said, they at least had the decency to underperform the market.
| Longs | Performance (15 Mar - 15 Jun 2014) | Shorts | Performance (15 Mar - 15 Jun 2014) |
|---|---|---|---|
| Fresnillo | -12.8% | Vodafone | -12.2% |
| St. James's Place | -5.0% | Pearson | 11.2% |
| Associated British Foods | 6.7% | Wm. Morrison | -7.5% |
| Randgold Resources | -8.6% | Aberdeen Asset Mmgt | 20.3% |
| Barratt Developments | -16.0% | J. Sainsbury | 2.9% |
| Ashtead Group | -1.4% | Melrose Industries | -2.1% |
| Aviva | 1.5% | Rolls Royce | -1.3% |
| Whitbread | -0.8% | BG Group | 18.3% |
| Admiral Group | 4.4% | IMI | 8.8% |
| Next | -5.1% | Coca-Cola HBC | -1.7% |
| Average | -3.7% | - | 3.7% |
| FTSE 100 | 3.8% | - | 3.8% |
Source: S&P CapitalIQ
At times like this, it is worth remembering that momentum strategies are only ever meant to be systems that work over the long term. Since I began monitoring this very simple single-factor stock screen it has substantially outperformed the FTSE 100 index which the stocks are selected from (see graph). It should, however, be noted that the performance figures I calculate do not include dealing costs or spreads, which are significant factors given the amount of stock turnover demanded by this strategy.
The damage done to the performance of the longs was mainly down to some clear reversals in market sentiment during the three months. Most marked was the 16 per cent drop recorded by Barratt Development’s shares. Following a great run, housebuilders have been marked sharply down over fears about both valuation and the possibility of end markets being hit by rising interest rates and the withdrawal of government house-buying incentives.
While the change in sentiment towards house builders was probably the most obvious illustration of the fickleness of the market, Fresnillo and Randgold’s respective 13 per cent and 9 per cent falls reflected another major change in view - a major deterioration in the perceived prospects for precious metals. Fresnillo appears as a short in our new momentum portfolio, although ironically, this has coincided with a recent improvement in sentiment towards precious metals and the stock. We will have to see how long-lived this optimism proves, but this magazine has itself recently tipped the shares as a short-term trade on improving silver prices.
More often than not, I update this screen prior to the official end of the three-month review period (all long picks are based on the best performing shares over the previous three months and shorts are based on the worst performing shares) but this update comes after the period close on 15 June. I have therefore included the official list of longs and shorts below against which I will assess performance in three months time, however, my write-ups of the 10 'long' shares below is based on a more up to date performance period to 20 June (hence Tullow appears rather than United Utilities).
Official Longs and Shorts based on performance in the three months to 15 June 2014
| Longs | Shorts |
|---|---|
| SABMiller | Barratt Developments |
| Intercontinental Hotels | Fresnillo |
| Aberdeen Asset Management | Friends Life Group |
| BG Group | Babcock International |
| Meggitt | Vodafone |
| Smith & Nephew | Travis Perkins |
| The Royal Bank of Scotland | Royal Mail |
| Shire | William Hill |
| United Utilities | International Consolidated Airlines |
| Unilever | ITV |
Source: S&P CapitalIQ
10 Momentum Longs
