Practical Applications of When Growth Beats Value:Applying Momentum Filters to Growth and Value Portfolios

Abstract

<h3>Practical Applications Summary</h3> In <b>When Growth Beats Value: <i>Applying Momentum Filters to Growth and Value Portfolios</i></b>, in the August 2019 edition of <b><i>The Journal of Investing</i>, Andrew Clare, James Seaton,</b> and <b>Stephen Thomas</b>, all of <b>ass Business School, City University</b>, and <b>Peter N. Smith</b> of the <b>University of York</b> analyze momentum investing and whether simple adaptations of momentum factors can augment the performance of growth and value portfolios. They compare the returns from applying momentum-based trading rules to developed and emerging markets and to growth- and value-oriented investing. The crux of their article is a distinction between <i>relative momentum</i>, which ranks assets based on their performance against one another, and <i>absolute momentum</i>, which ranks assets based on whether they have displayed recent positive returns. The authors find that the performance gap between buying and holding a value portfolio over a growth portfolio shrinks after the application of a relative-momentum filter. They note that growth investing can generally outperform comparable value and conventional buy-and-hold strategies when investors use momentum-based rules, though value strategies can benefit as well. Trend following in particular offers significant benefits over a buy-and-hold strategy. The authors additionally find that absolute-momentum overlays deliver better returns overall than relative-momentum ones (except in the case of developed-market growth stocks), along with lower volatility and smaller drawdowns. <b>TOPICS:</b>Factor-based models, performance measurement, emerging