It could be a bit of a dangerous time for momentum investing. That's because the recent increase in market volatility may mark an inflection point, when previously established trends are turned on their heads. Recent strong performance from resources companies, the dogs of 2013 to date, is a case in point.
However, rigid stock-screening techniques such as momentum investing require true followers to implement the strategy without recourse to either emotion or intuition. There are clear virtues to such a discipline as, over a period of three months - the period over which our momentum portfolios are run before being rejigged - much can change in ways that are very hard to foresee.
The most recent three-month period (which ends on 15 June 2013) for our blue-chip momentum portfolios demonstrates the value of following prevailing trends, though. While the long portfolio (the 10 best performing stocks of the previous three months) performed broadly in line with the FTSE 100 index (-1.4 per cent versus -0.5 per cent*), the short portfolio (the 10 worst performers of the previous three months) proved just how dangerous it can be to make contrarian calls. Despite the short portfolio including Marks and Spencer, which turned out to be one of the best performing blue-chips in the period, the overall performance of the portfolio was another 11 per cent drop.
Performance of the momentum portfolio since June 2007
The new long portfolio is listed below with a short write-up of each stock. The shorts are published in a separate table.
THE LONGS
A rejected bid and subsequent revised offers from a Kuwaiti sovereign wealth fund and the Canadian pension fund has caused Severn Trent's (SVT) shares to soar. The most recently rejected offer was at 2,200p a share. The bid has highlighted the attractiveness of the reliable inflation-linked income offered by utility companies, especially as it comes late in the five-year regulatory review cycle, which means it is a particularly risky time to make an offer. However, given the bid situation, this stock is arguably in the portfolio for the wrong reasons and we won't be including it in our calculation of returns for the upcoming period. We therefore have included a write-up of an 11th stock, GlaxoSmithKline, below. Last IC view: Hold, 2,038p, 30 May 2013
| 3-month momentum* | Price | Market value | Dividend yield | Forward PE ratio |
|---|---|---|---|---|
| 26% | 2,070p | £4.9bn | 3.7% | 23 |
Source: S&P CapitalIQ
There are signs that Lloyds (LLOY) is putting some of its legacy issues behind it, which has led to an increased focus on the bank's recovery prospects and even the possible reprivatisation of the government's stake. Payment Protection Insurance claims are now falling at the same time as loan quality is improving and impairment charges are down, too. This has allowed attention to focus more on the £2bn of cost-cutting the group has achieved over recent years and the impact of asset sales on strengthening the balance sheet. The torrid economic conditions in the UK remain a problem for the sector, though, and it looks unlikely that Lloyds will reinstate its dividend any time soon (last IC view: Hold, 56p, 1 May 2013).
| 3-month momentum* | Price | Market value | Dividend yield | Forward PE ratio |
|---|---|---|---|---|
| 23% | 62p | £44bn | - | 15 |
Shares in retailer Marks and Spencer (MKS) rallied strongly ahead of results last month on hopes that investors would be treated to the first signs of a recovery. However, trading news underwhelmed and, while still well up since 15 March, the shares have been weakening ever since. The key problem for the group is its troubled clothing division, which continues to disappoint, but it is hoped a change in management and a well-received autumn/winter collection will pep up performance. Investment has also been made to boost online sales. Tough economic conditions are a headwind but foundations are being laid for a recovery, even if there is little tangible evidence of it yet (last IC view: Hold, 451p, 21 May 2013).
| 3-month momentum* | Price | Market value | Dividend yield | Forward PE ratio |
|---|---|---|---|---|
| 21% | 452p | £7.3bn | 3.8% | 14 |
Shares in DIY retailer Kingfisher (KGF) have risen strongly on recovery hopes. The group's self-help potential, strong market position and robust balance sheet means it has a good story to tell. However, first-quarter results at the end of last month provided little in the way of positives, although the disappointing update did help extend the share price rally. Poor weather has contributed to weak trading across the group's operations in the UK, France and other international markets. That said, the group did note a pick-up in activity recently as the sun began to appear (last IC view: Sell, 337p, 5 Jun 2013).
| 3-month momentum* | Price | Market value | Dividend yield | Forward PE ratio |
|---|---|---|---|---|
| 21% | 347p | £8.2bn | 2.7% | 15 |
Expectation-busting results this month have helped propel shares in platinum refiner and catalytic converter group Johnson Matthey (JMAT) to an all-time high. The company has been suffering due to a drop-off in refining business as a result of weaker prices. A major contract has had to be renegotiated and the group has faced operational issues, too. However, the business has started to make something of a recovery. Meanwhile, the catalytic converter business is performing strongly, helped by strong demand from North America and new legislation (last IC view: Hold, 2,779p, 7 Jun 2013).
| 3-month momentum* | Price | Market value | Dividend yield | Forward PE ratio |
|---|---|---|---|---|
| 17% | 2,704p | £5.5bn | 2.1% | 17 |
BT's (BT.A) shares have benefited recently from speculation that, following a period of heavy investment in the business, BT could return capital to shareholders. The group is also attempting to push into the provision of TV content following significant investment in sports rights. This could help the group's pricing power and improve its ability to offer bundled packages. There has also been some excitement about potential demand for its superfast fibre-optic internet services given the recent success of competitor KCom in this area (last IC view: Hold, 306p, 13 May 2013).
| 3-month momentum* | Price | Market value | Dividend yield | Forward PE ratio |
|---|---|---|---|---|
| 15% | 313p | £24bn | 3.0% | 12 |
The UK's Reits were on a tear for much of the period measured by this quarter's momentum portfolio, however, more recently share prices in the sector have gone sharply into reverse. The ascent of shares in Land Securities (LAND), the UK's largest Reit, have been aided by a storming set of full-year results when the company posted expectation-busting gains in the value of its properties. Land Securities is benefiting especially from valuation gains on its City office developments, including the Walkie Talkie tower (last IC view: Hold, 970p, 15 May).
| 3-month momentum* | Price | Market value | Dividend yield | Forward PE ratio |
|---|---|---|---|---|
| 13% | 931p | £7.3bn | 3.2% | 24 |
GKN's (GKN) expansion through acquisition in the civil aerospace market is looking increasingly well timed given the strong fundamentals in the sector. Cost savings are also helping the engineering company's overall performance and, while tough economic conditions, especially in Europe, are a headwind, the group's automotive activities have been outperforming the wider market. Military cutbacks are also an issue for the group, but more than compensated for by the strength of the civil aerospace side (last IC view: Buy, 260p, 26 February 2013).
| 3-month momentum* | Price | Market value | Dividend yield | Forward PE ratio |
|---|---|---|---|---|
| 13% | 309p | £5.0bn | 2.3% | 12 |
Next (NXT) continues to hoist its flag as a core holding in the general retail sector and, as such, has enjoyed fulsome benefit from the recent sector re-rating. The story is fairly familiar. Profits from stores continue to be boosted by cost-cutting, despite flat sales. Meanwhile, the group's directory business and international online expansion are producing good growth. The company also has a strong reputation for enhancing returns through regular share buybacks (last IC view: Hold 4,184p, 21 Mar 2013).
| 3-month momentum* | Price | Market value | Dividend yield | Forward PE ratio |
|---|---|---|---|---|
| 12% | 4,601p | £7.0bn | 2.3% | 14 |
EasyJet (EZJ) has been flying since it was promoted to the FTSE 100 just before the end of our last three-month momentum monitoring period. The airline recently confirmed that the business was continuing to meet the City's high expectations. The company has been benefiting from the withdrawal of planes by weaker rivals, which has left it with the opportunity to fill the gaps. Other initiatives, such as attracting more business travellers, have also been helping performance and recent oil price weakness is good news for fuel costs (last IC view: Hold, 1,193p, 15 May 2013).
| 3-month momentum* | Price | Market value | Dividend yield | Forward PE ratio |
|---|---|---|---|---|
| 11% | 1,194p | £4.7bn | 1.8% | 14 |
News last month that GlaxoSmithKline (GSK) planned to hive off its older, non-core medicines into a separate business has created a lot of excitement. There's speculation that this is a precursor to a sale that could raise £9bn, which would be in addition to about £1bn expected from the sale of its Ribena and Lucozade drinks brands. It also underlines management's confidence in the group's drugs development pipeline and core drug portfolio following a period of heavy patent expiry, which it is judged to have come through very well (last IC view: Hold 1,463p, 6 February 2013).
| 3-month momentum* | Price | Market value | Dividend yield | Forward PE ratio |
|---|---|---|---|---|
| 11% | 1,663p | £81bn | 4.5% | 14 |
The shorts
| Name | TIDM | 3-month momentum* | Price | Market value | Dividend yield | Forward PE ratio |
|---|---|---|---|---|---|---|
| Evraz | EVR | -48% | 128p | £1.9bn | 5.3% | - |
| Eurasian Natural Resources | ENRC | -29% | 245p | £3.2bn | 1.6% | 7.4 |
| Polymetal International | POLY | -26% | 676p | £2.6bn | 2.8% | 8.5 |
| Fresnillo | FRES | -23% | 1,144p | £8.4bn | 3.1% | 21 |
| Anglo American | AAL | -23% | 1,463p | £20bn | 3.6% | 11 |
| Tullow Oil | TLW | -20% | 1,004p | £9.1bn | 1.2% | 22 |
| Glencore Xstrata | GLEN | -19% | 315p | £42bn | 3.1% | 12 |
| G4S | GFS | -18% | 245p | £3.4bn | 3.7% | 11 |
| Aggreko | AGK | -17% | 1,658p | £4.4bn | 1.4% | 18 |
| Standard Chartered | STAN | -16% | 1,474p | £36bn | 3.5% | 9.9 |
*Due to the timing of publication data stock selection is based on a performance period of 15 March 2013 to 10 June 2013. In future updates this will be adjusted to account for the official period end date of 15 June 2013 which means performance for the period will differ from the numbers reported in this article and the Long and Short portfolio constituents may change.
