obtaining positive alpha in mid-cap u.s equities using momentum strategies!!
DESCRIPTION
Obtaining Positive Alpha in Mid-Cap U.S Equities Using Momentum Strategies!!. Presentation by: J_ SCAD Asset Management Jun Qin Shoaib Mohammed Chris Rudolph Amy Parvaneh Daniel Kuwornu. Agenda. Objective Method Results Conclusions Questions. Objective. - PowerPoint PPT PresentationTRANSCRIPT
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???