The disappointing run from my blue-chip momentum screen has continued over the past three months. Not only have the long picks underperformed the FTSE 100 (the third time this has happened in the past five three-month screening periods), but the shorts have once again outperformed (the fourth time they've done this in the past five quarters). The market's nervousness has really not suited the strategy, with one period's favoured bets quickly becoming yesterday's news. Meanwhile, swift turns in sentiment mean the short portfolio has racked up strong gains over recent periods, most notably due to the incredible rally in resources stocks.
| LONGS | SHORTS | ||
|---|---|---|---|
| Name | 15 Mar - 9 Jun 2016 | Name | 15 Mar - 9 Jun 2016 |
| Anglo American | 37% | Legal & General | 1.7% |
| Glencore | -1.0% | Marks and Spencer | -6.1% |
| Randgold Resources | 4.9% | Whitbread | 6.8% |
| Fresnillo | 31% | Inmarsat | -23% |
| Tesco | -16% | Berkeley | 3.7% |
| Rolls-Royce | -12% | Hikma Pharmaceuticals | 31% |
| Antofagasta | -18% | Royal Bank of Scotland | -5.2% |
| Pearson | -5.3% | Barclays | 7.7% |
| Burberry | -19% | Ashtead | 20% |
| Smiths | 4.5% | Sports Direct Int | -5.4% |
| Average | 0.5% | - | 3.1% |
| FTSE 100 | 1.6% | - | 1.6% |
Source: S&P Capital IQ
All in all, the blue-chip momentum longs are showing underperformance on both a one- and three-year view, while the shorts have outperformed over both periods. Over five years the longs are outperforming, but so are the shorts. What's more, the shorts are now just about outperforming the index since the screen's inception, the first time this has ever been the case.
| Capital return | Since inception (15 Jun 2007) | 5 years | 3 years | 1 year |
|---|---|---|---|---|
| Long | 79% | 34% | 1.4% | -4.6% |
| FTSE 100 | -8.9% | 16% | -5.3% | 1.6% |
| Short | -8.8% | 17% | 14% | 4.7% |
This screen uses a classic momentum investing strategy based on making a long portfolio of the 10 best performing blue-chip equities of the previous three months and a short portfolio from the 10 worst performers. The portfolios are then reshuffled every three months. The picks for the next three months have something of a 'risk on' flavour, and have a noteworthy number of resources stocks among the selection. There is a rich body of work pointing to the long-term outperformance of basic momentum strategy, so one would be hoping to see a reversion to outperformance from this screen at some point; hopefully it'll come in the coming three months.
I've provided brief write-ups of the 10 long picks below and fundamental data relating to these stocks and also the shorts is included in the accompanying table. Due to the timing of publication of the magazine the picks do not represent a full three-month performance period. Future assessments of the performance of this strategy will be based on a full three-month period, which means some of the momentum picks may be different from those published below.
BLUE CHIP MOMENTUM SHARES
RESOURCES STOCKS
Anglo American (AAL), Fresnillo (FRES) and BHP Billiton (BLT)
While the three resources stocks that have made it as momentum long picks have businesses with differing characteristics, much of the performance seen over the past three months can be seen as having a common cause: improved sentiment towards the commodities they produce. The large fixed cost bases of these businesses and the long-term nature of their investment programmes means any improvement in prices for the resources they sell is likely to cause a big jump in profits. While a lot of uncertainty still exists about the future, momentum since lows earlier this year has been impressive.
