We usually think of momentum investors as the people who pile on to stocks that are already hot, hoping to catch the rest of their run, but low momentum stocks (that have been growing slowly) outperformed in April while typical momentum traders took a beating as market corrections punished many stocks that had been gaining over the last year.
“Against expectations, Low 12m Price Momentum was our best performing style in the developed markets, beating the benchmark by 1.9% in April 2014,” write UBS analysts Simon Iley, David Jessop, Claire Jones in a May 1 report. “The month was notable in that four quality-low and three momentum-low styles featured in the top 12.”
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Low 6-month price momentum also outperformed the Dow Jones Global Index by 1.54% while high 12-month and 6-month price momentum underperformed by 1.94% and 1.25% respectively. This trend reversed in the short term with 1-month high price momentum outperforming 0.25% and 1-month low price momentum underperforming 0.70%.
Low earnings momentum beat low 12-month price momentum in emerging markets by a basis point to be the best EM style in April, outperforming the index by 1.7%. Low EBIT/EV was the worst performing EM style, underperforming the index by 2.4%, while low beta and low volatility strategies were also strong performers.
Growth strategies behaved similarly, with high historical EPS growth underperforming by 1.25% and high earnings growth falling behind by 0.90%, though both measures outperformed in Asia ex-Japan. Low historical EPS growth outperformed the DJGI by 1.58%.
Most value strategies outperform in April
Most value strategies beat the DJGI last month, with the strongest performance in Europe ex-UK, Japan, and Asia ex-Japan. High dividend yield was the top global value strategy outperforming the DJGI by 1.49%, followed by high EBIT/EV (1.14%), and high book/price (0.75%). Low PEG underperformed global markets by 0.25% but outperformed in Latin America by 1.75%
Momentum stock: UBS style timing underperforms
“Both the US and the European style allocation models would have underperformed last month, due to the very poor performance of the 12m momentum style,” write Iley, Jessop, and Jones. “We have re-run the optimisation for the models this month, which has led to some significant changes in suggested weights.”
UBS sets weights for its linear style timing model using volatility, slope of the yield curve, and the value spread (difference between average book-to-price in value and growth baskets) for the respective regions. But as most investors will tell you, trying to time the market is imperfect at best and often misses transitions.