While my blue-chip momentum portfolio has had a decent quarter, rising 3.2 per cent compared with 1.5 per cent from the FTSE 100 index, the outperformance was achieved in the most precarious of fashions. Indeed, the lion's share of the screen's success in the period can be attributed to a single stock: Shire.
Only four out of the 10 long stocks picked by the screen in June outperformed the market and, of them, Shire was the only one which outperformed with any real gusto. Shire’s shares were up 43 per cent in the period thanks to an agreed takeover by US drugs company AbbVie. Without the inclusion of Shire, the nine other stocks would have dropped by 1.3 per cent on aggregate.
The significance to the overall performance of the screen that can be attributed to Shire helps emphasise the importance of a portfolio approach when using highly-mechanised screening processes, such as momentum. The short picks from June (shares which are meant to do badly in the coming period) failed to find a loser to rival the winner the longs found with Shire.
The worst performing short was Royal Mail which dropped 12.8 per cent as the lustre of its recovery and income story continued to fade. Unfortunately, the short portfolio did contain some major winners, including ITV which was the second best performing blue chip of the period after Shire - it rose 25 per cent. Another stand out performance from the shorts was a 12.7 per cent rise from Fresnillo, which is also among this current quarter’s long picks. All in all the shorts were ahead by 4 per cent.
It is not too unusual for the shorts to outperform the market, which is the opposite of what they are meant to do. In fact, since I began monitoring the blue-chip momentum screen in June 2007, the shorts have been more likely to outperform the market than underperform it. The short portfolio has actually outperformed 55 per cent of the time compared with the longs that have outperformed 62 per cent.
But the key difference between the long and short portfolio is not down so much to how often they outperform or underperform the wider market, but rather by how much. Indeed, the Shorts can fall very sharply when things are bad, while the Longs can do extremely well when the market has latched firmly onto positive themes. As the graph below shows, over time the longs have substantially outperformed the shorts despite the potential for the portfolios to frequently move in the opposite direction to the one desired. The longs boast a cumulative gain since June 2007 (ignoring the negative effect of spreads and dealing charges and the positive effects of dividends) of 95 per cent compared with an anaemic 0.5 per cent from the index and a 12 per cent loss from the shorts.
Momentum
How the stocks are picked
The long and short picks listed below are based on performance between 15 June to 8 September rather than the full screening period to 15 September, in order meet for the production schedule of the magazine. I will, however, calculate future performance of the screen based on the full screening period, so the stocks in the official portfolios may differ from those listed below. Shire has been excluded from the Long portfolio given that it is at an advanced stage of an agreed takeover offer process.
THE LONGS
