the death of momentum investing: blame Morningstar

David_Snowball

Or, more precisely, a sensible decision made by Morningstar 20 years ago.

Mark Hulbert's latest WSJ piece, "Momentum investing has struggled for two decades. Here's why." was published today. It reports on some new research that points that (some manifestations of) momentum investing essentially stopped working about two decades ago. Pre 2002, a strategy that loaded up on the preceding year's 10% of highest returning stocks and shorted the 10% of lowest returners, crushed the broad market average. In the year's since, the same strategy lost money annually in the face of rising markets.

The researchers blame Morningstar. Or, at the very least, attribute the collapse of momentum to a change they made. Prior to 2002, all stock funds were benchmarked against each other; you got to be a five-star SCV fund by outperforming large caps and midcaps and small caps. After 2002, funds were benchmarked against their style peers (you got to be a five star SCV fund by outperforming other SCV funds). The researchers note that money flows to five star funds, so pre-2002 money disproportionately flowed to whatever funds - in the entire universe - were hottest. That fed the momentum already shown by the stocks in those funds.

After 2002, the effect became greatly diluted since there were five-star funds scattered all over the investing universe with some of them qualifying as no more than "the best of a bad lot."

John Rekenthaler is, understandably, skeptical because ... you know, Rekenthaler. His argument is that fund flows represent just a fraction of all stock investment flows, so even if Morningstar influenced that subset of investors, a far larger set would have been unaffected. The researchers recognize that fact, but point to the undenied effect over ratings on new fund flows.

For what interest it holds. David

WABAC

There's no shortage of etf's advertising their momentum strategies.

With 34 ETFs traded on the U.S. markets, Momentum ETFs have total assets under management of $16.43B. The average expense ratio is 0.60%. Momentum ETFs can be found in the following asset classes:

Equity
Asset Allocation

The largest Momentum ETF is the iShares MSCI USA Momentum Factor ETF MTUM with $8.15B in assets. In the last trailing year, the best-performing Momentum ETF was QQH at 35.68%. The most recent ETF launched in the Momentum space was the ProShares NASDAQ-100 Dorsey Wright Momentum ETF QQQA on 05/18/21.

What am I missing in this story?

yogibearbull

It seems that M* has stopped providing the details for its backward-looking, performance-driven *-ratings on the website. Only the overall *-rating is now provided, not the details for 3-yr, 5-yr, 10-yr.

A less known fact is that newer funds get their first *-ratings as soon as they cross the 3-yr mark (until they become 5-year old), and that becomes their overall ratings too. But for the older funds, the overall rating is a weighted average of 3-year (20% weight), 5-year (30%), 10- year (50%) ratings; for funds with 5-10 year histories, the weights are 3-year (40%), 5-year (60%). So, older funds may have a more difficult time maintaining high overall ratings (but many good funds can do that).

WABAC

Upon further reflection, it occurs to me that 16 odd billion bucks is a pretty small number these days.

FD1000

Momo investing has done great since 1995.
1995-2000: US LC tilting growth did great(https://schrts.co/eYUxufSw) SPY,VWUSX made 247%,266% and musch more than VWIGX(International).

2000-2010: XLE(energy), IWM(SC), VWIGX(International) made more than SPY,QQQ(both lost money) especially until the meltdown of 2008(https://schrts.co/ZBJwxunx)

2010-current: US LC tilting growth did great(https://schrts.co/FNxGNwVc)