Momentum investing via direct shares has been one of the top-performing investment strategies in recent months. But the idea of momentum trading using mutual funds is also catching on.
Momentum investing is a strategy of capitalising on current price trends with the expectation that momentum will continue to build in the same direction. The basic idea is to "buy high and sell higher".
Two initiatives purport to improve fund investors' chances of identifying funds with the greatest chance of outperforming. But they are very different in both approach, cost and regulatory status.
1. Dynamic Fund Selection (www.fundexpert.co.uk)
FundExpert.co.uk, an online initiative from independent financial adviser Dennehy Weller & Co, runs a dynamic fund selection process which gives open-ended mutual funds "momentum ratings" of one to five stars. A five-star momentum rating should mean a high probability of extra growth. Any fund that is rated four-star or less is labelled as a 'sell' with the option to "view alternatives". This shows you the best funds in that same sector.
The broker chooses these alternatives by looking back over the past six months, analysing all of the funds in the appropriate sector and identifying the top performers.
Its research shows that six months is a good period over which you should review your funds. A number of other academic studies concur. However, the momentum ratings indicate short-term growth potential and do not give any indication of a fund's ability to provide income.
Most of the research for Dynamic Fund Selection was based on the UK All Company sector (UK growth funds). The firm tested the effectiveness of the momentum system, analysing 164 five-year periods since 1994. The results were as follows:
■ 7.67 per cent extra growth per annum - achieved by the Dynamic Fund Selection vs the average sector fund.
■ £4,468 average extra return after five years - from a £10,000 investment.
■ 90.85 per cent chance of outperformance - Dynamic Fund Selection outperformed in 149 out of 164 five-year periods.
There is no charge to view the service. If you want to buy your funds via FundExpert, you pay trail commission of 0.5 per cent per year of the value of your investment. However, you can view the fund selections and buy elsewhere if you like. FundExpert says there are no switch charges nor other incentives from fund managers, which ensures there is no bias with regards to its ratings.
Growth funds currently recommended by Dynamic Fund Selection:
2. Salty Dog Investor (www.saltydoginvestor.com)
Another momentum funds initiative is an unregulated funds newsletter run by a company called Salty Dog Investor. This takes a different approach to momentum investing, giving weekly data that investors can use to make investment decisions, a monthly newsletter plus two demonstration momentum portfolios.
It claims to have had market-beating success with its "Tug Boat portfolio", a cautious portfolio that it says has returned 25.3 per cent since it launched with the directors' own money in November 2010. Recent transactions on this portfolio include selling the JOHCM UK Equity Income Fund, selling the Invesco Perpetual Global Small Companies Fund and buying the Henderson Institutional Long Dated Credit Fund.
Salty Dog has recently added momentum data for investment trusts and a "Speedboat portfolio" based on exchange traded funds, which currently holds the iShares MSCI Japan Monthly EUR Hedged ETF (IJPE) and the dB X-trackers MSCI Thailand ETF TRN Index UCITS ETF (XCX4).
Richard Webb, managing director of Salty Dog Investor, says: "We maintain that the financial industry's belief that you should buy funds and hold them through thick and thin, hoping that at the end of the day your gains outweigh your losses, is not the best way to manage your investments.
"With accurate, unbiased, up-to-date performance data, we believe that private investors can improve the performance of their investments if they are willing to put in some effort.
"We are not regulated by the Financial Services Authority and are not allowed to give financial advice. Our aim is to provide accurate, up-to-date, unbiased performance data to help you make informed decisions."
Salty Dog's process is based on the past four weeks' performance data. Funds are put into five groups based on the underlying Investment Management Association sectors and then performance is top-sliced. Salty Dog then highlights five funds to buy in each group.
"Having bought a fund we then need to decide when to sell it," says Mr Webb. "If a fund has a weekly decile ranking below five for two weeks in a row, we consider selling it. If it has three consecutive weeks below five, then it goes. The other time we will sell a fund is when its sector is underperforming."
Interested investors can sign up for a free two-month trial, after which the service costs £25 a month (which equates to 0.3 per cent a year on a £100,000 fund portfolio). You will also have to pay the charges of the fund platform that you are using to trade your funds. However, most platforms have no initial upfront charges and no switching charges.
