obtaining positive alpha in mid-cap u.s equities using momentum strategies!!

Obtaining Positive Alpha in Mid-Cap U.S Equities Using

Momentum Strategies!!

Presentation by: J_ SCAD Asset Management

Jun QinShoaib MohammedChris RudolphAmy ParvanehDaniel Kuwornu

Agenda Objective Method Results Conclusions Questions

Objective

Investigate if pure momentum based strategies in mid-cap stocks can be improved with other univariate factors to increase return in portfolio management

Momentum based strategies are based on the premise that recent strong or weak performance will continue into the next period.

Momentum strategists look at a strong price chart, rapid earnings growth and recent positive changes in earnings growth forecast to make investment decisions based on the above premise.

Which factors or in what combination will lead to higher

positive alphas.

Which holding periods eliminates downside risk.

Method Our procedure is to find the best factors, through the best time frame, to fit

each of the following momentum categories. The factors that we initially estimated to be the best were:

Category FactorRelative Strength 12 M Total Return L 1M

6 M Total ReturnEarnings Momentum 3 yr EPS growth

1 yr EPS growthRevenue and Rev growth Revenue Growth Q/Q

3 y Revenue Growth/shareReturn on Investments ROE Growth

ROA GrowthTrading and Volume % change in price y/y

Average Volume change * Average Price Change

Method (Cont.) Scenario 1: Pure momentum strategy Momentum =+,-5, Other factors =0 Scenario 2: Modified momentum strategy Momentum = +,-5, Other factors = +,-1 Scenario 3: Momentum = +5,-3, with

subjective factors

Other factors:3yr EPS growth, 1yr Price change, Revision Ratio, SUE, BV to Price

Univariate Scoring SystemQ1 Q5

12 month total return: +5 -33 yr EPS growth +5 -51 yr price momentum +1 -1Revision ratio +5 -3SUE +5 -3BV to P +5 -3

Results!

(0.40)

(0.20)

-

0.20

0.40

0.60

0.80

1.00

Momentum -5 v 5

Momentum -5 v 1

Momentum -5 v 0

3 Yr Gr EPS 1 yr price chg Revision Ratio SUE BV to P

Quintile 1 vs Quintile 5

Alpha

Beta

Results

Universe Sharpe Information % > % > Up %>Down ExcessAlpha Beta Return Ratio Ratio Bench Bench Bench vs. Bench

Momentum - 5 v 5Equally Weighted 0.93 (0.01) 0.92 0.16 1.07 20.24 23.46 14.44 0.92 Value Weighted 0.87 (0.01) 0.85 0.15 1.02 16.67 17.90 14.44 0.85

Momentum - 5 v 1Equally Weighted 0.82 (0.13) 0.69 0.11 0.56 11.90 12.96 10.00 0.66 Value Weighted

Momentum - 5 v 0Equally Weighted 0.87 (0.15) 0.71 0.11 0.53 12.70 16.67 5.56 0.69 Value Weighted 0.82 (0.14) 0.68 0.11 0.53 10.32 10.49 10.00 0.65

Univariate Factors12 Mo TR 0.87 (0.15) 0.72 0.11 0.54 13.10 17.28 5.56 0.69 3 Yr Gr EPS 0.15 0.22 0.31 0.02 0.35 4.55 7.41 (3.33) 0.34 1 yr price chg 0.81 (0.12) 0.68 0.10 0.51 11.51 15.43 4.44 0.66 Revision Ratio 0.65 0.02 0.67 0.12 0.79 11.90 14.20 7.78 0.67 SUE 0.25 0.14 0.35 0.05 0.46 6.12 11.73 (7.78) 0.37 BV to P 0.55 (0.24) 0.41 0.12 0.51 3.57 (11.11) 30.00 0.36

Heat Map!

1991 168.2 145.4 139.4 144.7 129.7 163.2 143.4 136.6 141.7 130.2

1992 119.9 115.0 119.1 119.5 112.7 117.3 114.8 118.2 117.3 113.3

1993 132.3 123.1 118.1 122.2 116.1 127.1 121.7 118.6 121.0 117.4

1994 103.2 99.6 97.9 99.9 97.5 101.8 95.3 98.3 98.5 98.8

1995 138.5 132.2 126.0 125.7 123.2 135.6 124.4 131.1 126.6 127.5

1996 125.6 122.2 119.0 117.4 113.5 122.4 121.9 118.9 117.5 112.1

1997 127.5 127.7 123.7 124.4 119.0 128.8 133.6 123.2 122.7 117.5

1998 109.2 103.8 99.7 104.3 92.8 112.4 105.5 101.6 104.6 96.2

1999 148.5 120.5 112.0 123.6 116.0 160.4 125.1 118.0 124.2 110.9

2000 100.9 99.5 100.7 90.2 103.0 100.6 99.1 101.4 88.5 104.6

2001 93.5 97.4 98.5 108.3 106.0 91.8 94.1 99.4 101.4 100.7

2002 87.4 89.7 87.2 78.4 68.6 86.2 89.9 87.4 81.1 69.6

2003 145.7 144.3 146.9 143.7 154.4 144.2 142.8 146.2 141.3 152.5

2004 120.0 122.0 122.3 117.0 117.5 119.2 123.3 123.7 114.8 120.1

2005 114.9 114.4 109.3 106.3 102.7 117.8 117.1 113.1 108.3 105.3

1985 145.2 138.1 132.4 111.5 124.8 140.2 135.9 132.7 116.9 129.1

1986 131.9 125.7 120.8 123.6 105.5 131.7 126.1 123.9 126.1 106.6

1987 105.1 104.9 96.1 100.2 95.5 105.1 104.0 96.3 105.6 97.1

1988 127.0 122.1 119.8 128.8 115.5 126.1 118.2 121.2 131.9 117.0

1989 141.2 133.6 125.7 113.8 114.8 146.1 132.5 126.6 120.4 117.1

1990 95.7 90.8 95.1 89.5 83.6 96.4 89.2 91.2 94.0 80.5

Year 1 2 3 4 5 1 2 3 4 5Equal weighted Value weighted

Momentum combined with other unitvariate factors will lead to higher positive alpha in a portfolio management strategy.

The main conclusion of our results is that momentum is a major contributing factor to attaining high alpha in a portfolio management strategy.

Momentum as a sole factor will achieve high returns, but not as high as when combined with other univariate factors in a portfolio management strategy.

Further Research Snowball effect amongst momentum

investors Investigate different time frames for

momentum Differentiate between mid-cap versus

small/large-cap stocks Momentum strategies in emerging

markets and FX

Any Questions???