Momentum mutual funds have slumped: What should investors do now?
There is no escaping gravity, momentum investors are discovering the hard way. Amid a market downturn, the investors who had previously made merry riding winners are now licking their wounds. Momentum-based funds are currently among the worst hit. If the correction is prolonged, the resolve of momentum seekers may get tested.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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Momentum’s current woes are not surprising. This strategy of chasing recent winners had yielded outsized gains in recent years amid a near-uninterrupted rise in the stock market. This tempted many to pile on to this trade, expecting quick gains. However, momentum investors were skating on thin ice, as ET Wealth had warned in July last year. All investing strategies swing between extremes over long time periods, and momentum is no exception. A mean reversion was expected, and it seems to be playing out ruthlessly. Momentum is proving to be painful on the downside. Yet, the drawdown is not unexpected and is indicative of the market-wide slump, remarks Anoop Vijaykumar, Fund Manager and Head of Research, Capitalmind. “A typical momentum stock had significant earnings growth expectations baked in. As these are not being met, such stocks are correcting more. There are very few pockets that have not corrected.” Anish Teli, Managing Partner, QED Capital Advisors, observes, “The market is clearly seeing a downtrend. Sector rotation is playing out, with momentum portfolios initially shifting towards defensives.”
Momentum’s run has been arrested
Until recently, chasing winners had yielded outsized gains.
Teli expects a painful, drawn-out correction this time, compared to the quick rebound seen in 2020. Momentum seekers’ fate hinges on the specific momentum strategy pursued. Outcomes will vary depending on the period chosen for capturing price trends (look-back period), the frequency of rebalancing the portfolio, and use of additional overlaying filters, among other things. Index-driven momentum funds embrace longer look-back periods and slower portfolio rebalancing. In other words, their portfolios reflect price trends captured over longer time frames and get reset after longer intervals. For instance, the Nifty200 Momentum 30 Index identifies stocks based on their six-month and 12-month price strength and rebalances the portfolio half-yearly. The longer look-back period ignores recent price trends. This, along with slower rebalancing, exposes the portfolio to ‘signal decay’—the risk that the portfolio will not be able to exit stocks before the price strength dissipates or correction becomes acute. The index last got rebalanced in December. Its next rejig will happen in June. For now, the index has shed nearly 19% since 26 September, even as the Nifty 50 has shrunk 11%.
Meanwhile, actively managed momentum strategies of mutual funds and PMS, which are typically run more fluidly, have cushioned the fall better. Many combine one- or three-month and six- or 12-month price trends with monthly or even weekly rebalancing. This captures both near-term and long-term price strength, while also reducing the signal decay that momentum investing is exposed to. “Being more responsive to market changes certainly helps,” points out Vijaykumar of Capitalmind, whose Adaptive Momentum portfolio has shed 10.3% amid this market correction.
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However, this is not the only difference. Many active momentum strategies also cut equity positions in favour of cash or fixed income when the trends are not supportive. Index-based offerings do not have this luxury. Samco Active Momentum has only fallen by 0.45% in the market decline. The fund actively hedges positions in periods of ‘anti– momentum’, cutting net equity exposure to as low as 0%. Portfolio managers also use other levers at such times. Teli says, “When there is no place to hide, we are very cautious in sizing of bets and will also enter stocks conservatively, spreading the outlay over a few weeks.”
However, momentum remains a slave to market trends, so if the correction persists, investors will suffer. Momentum strategies can go nowhere for long periods. However, exiting now is not the answer, experts maintain. For momentum worshippers, salvation lies not in abandoning the strategy, but in embracing the reset. “Momentum investors have no choice but to take this pain. Without it, the premium also won’t exist,” argues Teli. What he means is that momentum is tricky to live with, and that is precisely why it works for those who do.
Timing momentum is futile. Vijaykumar cautions, “There is no fixed precursor to a market rebound, so you risk being out of play when things start to improve.” At the same time, placing a bet on momentum now could spell disaster. The idea behind momentum investing is not to try and catch the top or the bottom of the market or a stock, but to simply ride an established trend. “We don’t mind giving up initial gains from the bottom or having returns shaved from the top until we see a clear trend that makes for a robust signal,” contends Teli. If you try to game momentum, it will backfire. Remain committed to the strategy for long term, even as you keep rotating among individual bets, Teli avers.
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This story originally appeared on: India Times - Author:Faqs of Insurances
