01 Apr Learning From Wellington's "Trend-following momentum investing"

Both relative and absolute momentum is important when choosing stocks. Stock should rank well relative to other stocks and also has positive price trend.

In this article, Absolute Momentum will be used interchangeably with trend following or time series momentum. Relative Momentum will be used interchangeably with cross-sectional momentum or relative strength.

Trends in fundamental and economic data persist and contribute to persistent price trends.

“Figure 1” in the paper (reproduced below) shows that relative momentum has delivered excess returns historically, along with value investing.

Source: Wellington Management

“Figure 2” in the paper (reproduced below) shows that absolute momentum has delivered better risk adjusted returns.

Source: Wellington Management

Low correlation is observed between relative momentum and value investing. Most equity investment plans are skewed toward value premium. Absolute momentum would help to diversify most equity portfolios. “Figure 3” in the paper (reproduced below) shows that relative momentum is inversely correlated with value investing.

Source: Wellington Management

Momentum is under-appreciated in the market now and there are very few products available. Investors also may not understand why momentum investing works.

Wellington employs both relative and absolute momentum in their work by only including stocks that ranks well relative to other stocks and also has positive price trends.

Research Paper: Trend-following momentum investing: Attractive and underutilized

Authors: Frank Teixeira, CMT, CFA, David Lundgren, CMT, CFA, John Smallcomb, CFA

Company: Wellington Management