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When defensives and momentum fail

The good performance of a few large stocks has caused otherwise good stock-picking strategies to under-perform the market.

Have investors finally wised up to longstanding stock market anomalies, and so caused the market to become harder to beat? This is the question posed by the recent performance of our no-thought portfolios.

In the last three months all but one of these have under-performed the FTSE 350. This is odd, because you’d expect at least one to do well; for example, if our low-risk portfolio under-performs, our high beta one should out-perform, and vice versa.

The fact that this hasn’t happened raises the possibility that investors have finally learned that some simple strategies have beaten the market in the past – and in so learning, they might have bid away these sources of profit. For example, if investors had realized a few months ago that momentum investing is a good idea, they would have bought momentum shares, thus raising their prices to levels from which subsequent returns have been poor. The same fate might have befallen value and defensive investing.

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