The momentum strategy that generated a 5,662% return

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The momentum strategy that generated a 5,662% return

There was an interesting piece in the Telegraph recently that looked at whether momentum investing in funds can generate higher returns. The article considered a strategy that was devised and tracked by the investment platform FundExpert. This involved investing in the best performing fund over the previous six months and then repeating the process and switching every six months thereafter.

Their analysis found that over the period from 1 September 1995 to 31 August 2017 the strategy returned an amazing 5,662%. The performance dwarfed the 390% returned by the FTSE All-Share index and the 360% from the average UK All Companies fund.

FundExpert dubbed the strategy ‘bonkers’ because it involved putting all of your money in a single fund, which is obviously highly risky, but there’s no reason why you couldn’t apply it to a part of your portfolio while keeping the rest invested in steadier core holdings to reduce the overall risk.

Mark Dampier, head of research at Hargreaves Lansdown, says that he can see why momentum investing might work, but he thinks it’s an appalling idea for open-ended funds like OEICs and unit trusts.

“It might be OK if only a few people try it, but if lots of investors pull their money out of an open-ended fund at the same time the fund would have to move to a bid price or apply a dilution levy, so I’m not sure that it would work in real life. If it really caught on the fund platforms would all have to bring in a switching fee every time an investor moved their money from one fund to another.”

Mark Dampier says that he can see why momentum investing might work, but he thinks it’s an appalling idea for open-ended funds like OEICs and unit trusts.

Momentum investing is pretty close to a policy of risk maximisation, as can be seen from the figures from FundExpert. Their analysis of the ‘bonkers strategy’ showed that on average it was nearly twice as volatile as the FTSE 100 index or a UK All Companies fund.

“When something picks up, whether it is a sector or an investment style, it often carries on for a reasonable time, but sometimes areas go off quickly, especially if it is a specialist one like mining, so the question is whether you can get out quickly enough to still make money,” notes Dampier.

The momentum approach could help investors to take advantage of major shifts in the market. For example, since the financial crisis, growth managers have dominated their value orientated counterparts and it wasn’t until late last August when value started to recover. Europe also began to pick up at about the same time and it was this twin reversal that brought Neptune European Opportunities back to the fore and enabled it to be one of the best performing funds over the last year.

“If lots of people really want to do this why don’t they do it with ETFs or index funds, otherwise all they will do is wreck the performance of active funds and penalise the long-term investors,” says Dampier.

If you want to have a go or paper trade it for yourself the open-ended funds are all listed on FE Trustnet and you can customise the page to show the latest six monthly performance. According to their website, the top performer over the last six months was Old Mutual UK Smaller Companies Focus with a gain of 25.5%.

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