A strategy that combines momentum and value investing

April 13, 2018 11:42
A strategy that combines market momentum and fundamental value in stock selection may work better in a volatile market. Photo: Reuters

My two momentum-based mock portfolios have underperformed the Tracker Fund of Hong Kong (02800.HK) in the first quarter due to an extremely volatile market.

Amid the market turbulence, many stocks in the two momentum-investing portfolios triggered the cut loss limit in the first quarter. As a result, both portfolios have generated moderate losses during the period and underperformed the benchmark Hang Seng Index.

To handle a more choppy market, I have adopted a revised strategy that combines market momentum and fundamental value in stock selection criteria.

There are 10 criteria, eight are metrics related to a company’s financial strength, including earnings growth, return on equity, current ratio, quick ratio, gearing ratio, net profit margin, revenue growth rate and core profit growth rate.

The two remaining criteria – a 250-day average with rising relative strength versus the Hang Seng Index – aim to capture the momentum factor.

I have built two new mock portfolios, both containing five stocks each, and the key difference is that the first portfolio rebalances every three months, while the second portfolio rebalances every six months.

Through back-testing, we have found out that between 2007 and 2017, the first portfolio has outperformed the Tracker Fund of Hong Kong in seven years, while the second portfolio has outperformed in six years.

They delivered an accumulative return of 370 percent and 310 percent respectively. That translates into 15 percent and 13.6 percent annual return respectively, outperforming the Tracker Fund which tracks the benchmark index.

These portfolios also carry relatively less risk. The annual maximum drawdowns of the two portfolios are 11.68 percent and 9.56 percent respectively over the last 11 years. That’s much lower than the 21.31 percent of Track Fund in the same period.

In the first quarter of this year, the two mock portfolios generated a return of 9.4 percent including dividends, compared with 1.2 percent of the Tracker Fund.

Back-testing statistics indicate that such a combined strategy may work better in the currently more volatile market.

This article appeared in the Hong Kong Economic Journal on April 13

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]


Hong Kong Economic Journal chief economist and strategist