Value and Momentum Smart Beta – different sides of the coin

Over the rolling 12-months to June 2019 the Momentum Trending Equity Unit Trust delivered a return of 14.1% against 1.5% return of the average peer in the SA General Equity sector. The fund was ranked 2nd out of 157 peers in the Morningstar survey over this period. Over the 24 months to June 2019 this fund returned 15.3% p.a. against the average peer’s 4.7%, resulting in it being ranked 3rd out of 146 peers in the sector.

Smart Beta funds, i.e. funds that follow rules-based processes to gain exposure to various investment styles, are gaining in popularity globally and in South Africa. Momentum Investments launched their Value and Trending (“Momentum”) Smart Beta strategies in April 2017. These are available in both standalone and unit trust offerings.

Momentum’s approach to smart beta funds is different from that of most of our peers,” says portfolio manager Loftie Botha. “We prefer to develop an internal factor process rather than purchasing a smart Beta index ‘off the shelf’. Our portfolios are aggressively structured and not particularly benchmark cognisant.”

This approach is bearing fruit with both Momentum’s smart beta funds delivering excellent returns over the 26 months since launch until the end of June 2019.

Trending Smart Beta Offering

“While most investors can relate to the often used mantras of momentum investing:  The trend is your friend and cut your losses and let your profits run, there also is sound behavioural finance reason that explains why this strategy usually rewards investors handsomely over a cycle.”

Market inefficiencies that can be exploited are created by anchoring and herd behaviour. Anchoring happens when investors as a group are anchored to historic perceptions. Therefore, they will react slowly to new information and share prices initially under-react. So as time goes by and things become clearer, these investors react more and more, causing a trend. Just as in any herd, there are leaders and followers within the investing community. Leading investors start the trend and following investors extend and sometimes overextend this trending behaviour.

“The process followed with our Trending product involves selecting stocks that have attractive price momentum and earnings revision qualities.” Botha explains.

Value Smart Beta offering

Value investing is sometimes seen as the other side of the coin of momentum investing.” Botha continues.

Value investors aim to “buy low and sell high” and are not particularly interested in historic price movements. They rather follow a philosophy that is eloquently described in the words of Warren Buffet – “price is what you pay, value is what you get”. When a price is out of sync with a company’s fundamentals, it causes a market dislocation that can be exploited.

The main reasons for share prices moving into relative value territory are excessive negative sentiment due to bad news or normal cyclical behaviour where themes, sectors or shares temporarily fall out of favour. Value investors need to be patient and wait for the tide to turn to reap their rewards.

The process followed with our value product involves selecting stocks that have attractive value qualities as measured by parameters such as earnings and dividend yields, price to book ratios, cash yields and price to sales ratios.

The Momentum Value Equity Unit Trust also delivered a far higher return than its peers. Over the rolling 12-months to June 2019 this fund delivered a return of 12.9% against 1.5% return of the average peer in the SA General Equity sector. The fund was ranked 3rd out of 157 peers in the Morningstar survey over this period. Over the 24 months to June 2019 this fund returned 15.2% p.a. against the average peer’s 4.7%, resulting in it being ranked 4th out of 146 peers in the sector.

Both portfolios are actively managed. They have a focused exposure to around 30 value stocks and may deviate from the benchmark index weight by up to 6% per stock. The objective of these funds is to provide a return in excess of 1% over the Capped SWIX benchmark over rolling 3-year periods.



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