Market volatility is not always the best backdrop for momentum investing, but the roller-coaster ride experienced over the past three months has actually seen a pick-up in the performance of my blue-chip momentum screen.
Often volatile periods in the market reflect an overhaul of the prevailing market trends that momentum strategies attempt to latch on to. This can be disastrous for performance, but that’s not been the case in the three months under review (see table). Indeed, coming out of a torrid second quarter, when the blue-chip momentum longs drastically underperformed the market and the shorts - which are meant to perform worse than the index – shot the lights out, the strategy is beginning to find its feet again.
| Longs | Capital return (15 Jun - 1 Sep 2015) | Shorts | Capital return (15 Jun - 1 Sep 2015) |
|---|---|---|---|
| BG | -11.4% | Meggitt | 1.7% |
| Coca-Cola HBC | -8.7% | Standard Life | -14.5% |
| Taylor Wimpey | 6.9% | Hikma Pharmaceuticals | 17.0% |
| Babcock International | -14.1% | GlaxoSmithKline | -4.1% |
| Royal Mail | -10.8% | Wm. Morrison Supermarkets | -8.3% |
| Sage | -7.6% | Pearson | -13.9% |
| Barratt Developments | 4.6% | International Consolidated Airlines | 3.8% |
| Fresnillo | -18.0% | IMI | -14.6% |
| Marks and Spencer | -8.3% | Burberry | -18.6% |
| 3i | -13.9% | easyJet | 6.7% |
| Average | -8.1% | - | -4.5% |
| FTSE 100 | -9.7% | - | -9.7% |
Source: Thomson Datastream
Importantly, the longs, which have generally been more reliable since I started to monitor this strategy in June 2007, outperformed the blue-chip index. That said, the shorts have continued to misbehave by outperforming the FTSE 100 over the past three months and also outperforming the longs. At least the outperformance was of a lesser magnitude than the stellar run the shorts had the previous quarter. Over the long-term, the strategy continues to look impressive, though (see chart).
Source: Thomson Datastream
The blue-chip momentum screening process couldn’t be simpler. The longs are based on the 10 best performing FTSE 100 shares of the last three months and the shorts are based on the 10 worst performing shares. The shares are held for three months and then the selection process is repeated. The fact that academics have found time and again that such a simple strategy outperforms the wider market has earned momentum the nickname of “the premier anomaly”.
Brief write-ups of the 10 long picks for this quarter are provided below and the shorts appear in the accompanying table. Due to the publication schedule of this magazine, the longs and shorts are not based on a full three months to the official end-of-period date (15 September). Future reported returns will be based on the long and short portfolios based on the official end-of-period date – in practice, this is usually not much different to the stock lists published in the magazine.
THE LONGS
Generic drug company Hikma (HIK) has given investors a number of reasons to be cheerful over the past three months. News of the company’s $2.7bn cash-and-shares acquisition of Roxane went down well as it should allow Hikma to build scale and gain share in the US generics market. Investors were also able to take some encouragement from first-half results. While sales came in below expectations, the group’s industry-leading margins meant profits were better than expected. The company should continue to benefit from its push into higher-margin areas and the group has recently agreed a tie up with the UK’s Vitabiotics which could prove lucrative.
Last IC view: Hold, 2,46p, 19 Aug 2015
