All MyPlanIQ’s newsletters are archived here.
Re-balance Cycle Reminder
The next re-balance will be on next Monday, April 8, 2013. You can also find the re-balance calendar of 2013 on ‘Dashboard‘ page once you log in.
As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.
Please note that we now list the next re-balance date on every portfolio page.
Momentum Effects On Stocks, Sectors and Style Funds
In our previous newsletter
September 10, 2012: Taxonomy Of Momentum, Relative Strength And Trend Following
We outlined the following categories of momentum related investing:
- m1: A group of individual stocks such as Dow Jones 30 or Nasdaq 100 etc.
- m2: A group of industrial stock funds such as Fidelity’s famous Fidelity Select funds
- m3: A group of stock sector funds such as SPDR’s S&P sector ETFs such as SPDR Select Energy (XLE) etc.
- m4: A group of stock style funds such as Russell large, mid and small cap stock ETFs.
- m5: single stock index (fund) buy/sell decision
- m6: A group of diversified and somewhat uncorrelated asset classes such as stocks, bonds, real estates (REITs) and their minor asset classes such as long term bonds, international bonds, gold etc.
We discussed in some details on why category m6, investing in a diversified array of assets using trend scoring, is more effective than m5. We further made the following comments:
Our position for using momentum in investing individual stocks is that momentum can be an effective factor but it is very volatile and unpredictable in short terms. We do not recommend momentum individual stock investing for average investors. In fact, we believe the first 3 styles of momentum investing (m1 to m3) in the above are too fickle for average investors to deal with.
However, we believe momentum based stock funds, as other style stock funds such as large value or small growth etc., can be useful as they represent one of the 4 factors in stock investing.
In this newsletter, we present some results on momentum effect on stocks and sectors.
Momentum based individual stock funds and portfolios
The following lists momentum stock funds and their performance comparison:
Portfolio Performance Comparison (as of 3/28/2013)
| Ticker | Name | YTD Return** |
1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe | 10Yr AR | 10Yr Sharpe |
|---|---|---|---|---|---|---|---|---|---|---|
| AIMOX | AQR Intl Stk Momentum | 7.5% | 18.1% | 1.36 | 7.1% | 0.31 | ||||
| AMOMX | AQR Stk Momentum | 9.5% | 14.6% | 1.12 | 12.6% | 0.59 | ||||
| ASMOX | AQR Smallcap Momentum | 14.1% | 20.2% | 1.25 | 15.8% | 0.57 | ||||
| EEM | Emerging Mkt Stocks | -3.6% | 2.1% | 0.12 | 3.1% | 0.12 | 0.9% | 0.02 | ||
| EFA | Intl Stocks | 3.7% | 11.5% | 0.68 | 5.3% | 0.22 | -1.2% | -0.04 | 9.2% | 32.4% |
| IWM | Small cap stocks | 12.3% | 15.7% | 0.99 | 13.4% | 0.53 | 8.3% | 0.25 | 11.2% | 38.0% |
| PDP | Powershares DWA Technical Leaders | 10.7% | 15.0% | 1.07 | 15.8% | 0.73 | 5.3% | 0.19 | ||
| PIE | PowerShares DWA Emerging Mkt Stocks Technical Leaders | 8.8% | 15.0% | 1.04 | 11.2% | 0.46 | -1.0% | -0.04 | ||
| SPY | S&P 500 | 10.5% | 14.0% | 1.09 | 12.7% | 0.69 | 5.7% | 0.22 | 8.2% | 34.3% |
More detailed year by year comparison >>
These momentum based funds have shown some out performance recently. Specifically, AQR’s international stock fund (AIMOX) out performed EFA. Its small cap momentum stock fund (ASMOX) also performed much better than Russell 2000 (IWM) small cap index.
Furthermore, DWA’s emerging market stock fund PIE bettered EEM in the last 1 and 3 years, but lagged in the last 5 years.
In US stocks, both PDP and AMOMX didn’t do as well as SPY, indicating a difficult environment for momentum based stock strategies in 2011 and in general, in this bull market cycle.
Furthermore, if one looks at the year by year performance closely, it reveals:
- PDP lost -46.4% in 2008, compared with SPY’s -36.8% loss in the same period.
- PIE lost a whopping -63% in 2008, compared with EEM’s -49.5% loss in the same period.
We can generalize the observation: in general, momentum based stock investing is more volatile and it generally does better in a bull market but can incur large loss in a bear market.
Momentum based sector and style rotation
The following table shows the performance result of a sector rotation strategy over S&P 10 sectors listed on 360° Market Overview.
In each month, the portfolio selects top two sectors based on their trend scores and invests in the subsequent month.
Portfolio Performance Comparison (as of 3/28/2013)
| Ticker/Portfolio Name | 1 Week Return* |
YTD Return** |
1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe | 10Yr AR | 10Yr Sharpe |
|---|---|---|---|---|---|---|---|---|---|---|
| SPY | 1.5% | 10.5% | 14.0% | 1.09 | 12.7% | 0.69 | 5.7% | 0.22 | 8.2% | 34.3% |
| P Momentum Scoring Sector ETFs | 2.0% | 12.8% | 11.8% | 0.91 | 9.2% | 0.48 | 2.7% | 0.11 | 10.1% | 44.4% |
*: NOT annualized
**YTD: Year to Date
In 2008, it lost -27.1% vs. -36.8% of SPY. It also did worse in the last 1, 3 and 5 years.
How about m4, stock style rotation? The following shows the performance result of a portfolio which, in each month, selects top two style ETFs out of 9 iShares Russell stock style ETFs (large|mid|small cap x blend|growth|value):
Portfolio Performance Comparison (as of 3/28/2013)
| Ticker/Portfolio Name | 1 Week Return* |
YTD Return** |
1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe | 10Yr AR | 10Yr Sharpe |
|---|---|---|---|---|---|---|---|---|---|---|
| SPY | 1.5% | 10.5% | 14.0% | 1.09 | 12.7% | 0.69 | 5.7% | 0.22 | 8.2% | 34.3% |
| P Momentum Scoring Style ETFs | 0.9% | 12.8% | 17.4% | 1.31 | 14.4% | 0.68 | 6.7% | 0.23 | 10.1% | 39.2% |
From the above, the style rotation did better than SPY in the last 1, 3, 5 and 10 year periods. It had 1-2% out performance annually in the last 10 years. It did slightly worse than SPY in 2008: -40.7% vs. -36.8%. It has about similar Sharpe ratio.
Putting it altogether
Based on the above discussions, we make the following assessment:
- m1: A group of individual stocks such as Dow Jones 30 or Nasdaq 100 etc. — Can be Effective, but volatile.
- m2: A group of industrial stock funds such as Fidelity’s famous Fidelity Select funds. — Can be Effective, but volatile.
- m3: A group of stock sector funds such as SPDR’s S&P sector ETFs such as SPDR Select Energy (XLE) etc. — Can be Effective, but volatile.
- m4: A group of stock style funds such as Russell large, mid and small cap stock ETFs. — Effective and comparable risk.
- m5: single stock index (fund) buy/sell decision. — Fickle though might be on par with buy and hold.
- m6: A group of diversified and somewhat uncorrelated asset classes such as stocks, bonds, real estates (REITs) and their minor asset classes such as long term bonds, international bonds, gold etc. — Effective and lower risk.
Portfolio Performance Review
The following shows how some of MyPlanIQ’s portfolios are compared with two tactical funds:
Portfolio Performance Comparison (as of 3/28/2013)
| Ticker/Portfolio Name | 1 Week Return* |
YTD Return** |
1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe | 10Yr AR | 10Yr Sharpe |
|---|---|---|---|---|---|---|---|---|---|---|
| DWTFX (DWA Tactical) | 1.2% | 7.0% | 8.6% | 0.71 | 5.3% | 0.32 | ||||
| GTAA (Cambria Tactical) | 0.8% | 2.1% | 5.1% | 0.66 | ||||||
| Retirement Income ETFs Tactical Asset Allocation Moderate | 1.3% | 3.3% | 9.9% | 1.61 | 9.7% | 1.01 | 8.0% | 0.75 | 11.8% | 100.6% |
| MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate | 1.2% | 3.0% | 10.8% | 1.61 | 7.1% | 0.7 | 7.3% | 0.68 | 10.8% | 94.9% |
*: NOT annualized
**YTD: Year to Date
Overall, the portfolios are performing as expected, as the two funds.
Market Overview
US stocks are hanging at the record high territory. However, persistent weakness in emerging market stocks and commodities is pointing to a very uneven picture. Stocks can break out or break down from here. No one knows. All we can do is to stay on the course with acceptable risk levels.
For more major asset and various sub asset class trend ranking, see tables on Asset Trends & Correlations (for other detailed ranking, see 360° Market Overview).
We again copy our position statements (from previous newsletters):
Our position has not changed: We still maintain our cautious attitude to the recent stock market strength. Again, we have not seen any meaningful or substantial structural change in the U.S., European and emerging market economies. However, we will let markets sort this out and will try to take advantage over its irrational behavior if it is possible.
We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.
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How can we improve this newsletter — we value your inputs –Thanks to those who have already contributed — we appreciate it.
Diversified Asset Allocation Portfolios For Your Plans
Have to say this is a good summary. How’s this compared with morningstar’s momentum ranking? Any one cares to comment on M* momentum ranking. not so much info on their site.
See Morningstar Does Momentum Investing Work? (http://news.morningstar.com/articlenet/article.aspx?id=591675).