Probably the most frequently quoted caveat in the fund management industry is: “Past performance is no guide to the future”.
Nevertheless, momentum funds, which invest in financial instruments that move upwards with particular momentum, gained some popularity in the last bull market.
The vehicles seemed to defy gravity – and the occasional warnings of the industry – as they latched on to trends and themes that carried their portfolios ever higher than the market.
However, the volatility of 2008 and 2009 proved difficult for market trends to gain any momentum. As a result, providers, including Hasley and Bloxham, are launching funds that can exploit shorter-term oscillations in the market, move into cash when momentum breaks down altogether, or both.
”Even the more subtle funds got into difficulties at certain points of the turbulence in 2008-2009”
During the last bull market, several fund providers were already more sceptical about momentum in financial markets and assessed it in conjunction with other criteria.
Many used intricate analysis, often quantitative, to understand whether the instruments were moving upwards in the right way, and whether they would continue to move upwards.
On the same basis, some funds also shorted assets that were moving downwards with the same type of momentum. This gave them a hedge against momentum trends moving against them, particularly in downward markets. However, even these more subtle funds got into difficulties at certain points of the turbulence in 2008-09. (article continues below)
The Artemis European Growth fund, which assessed momentum as part of its analytical SmartGarp tool, ran more than £1 billion of investors’ money until the height of the financial crisis (see graph). The fund had outperformed over the five-year bull market from the start of 2003 to the start of 2008, returning 208% compared with 140% for its Investment Management Association (IMA) Europe ex UK peer group.
However, SmartGarp – which stands for Sentiment Momentum Accruals Revisions Top-Down Growth at a Reasonable Price – helped the fund underperform in 2008 and 2009, when it lost 32%, compared with 10% for the sector. Last year it recovered slightly against similar funds. Since the start of 2009 its track record has proved broadly in line with its peers over the timeline stretching back to the beginning of 2003.
European Growth runs only £345m, but SmartGarp is still used as one of the research tools in other Artemis products, including the group’s UK Smaller Companies fund.
Many momentum or trend-following funds ran into the same hardships in 2008 as SmartGarp, mainly because of the volatility in the market. But others found 2009 particularly difficult, despite broad rallies across most asset classes.
In particular, Man Group’s flagship AHL Diversified Futures strategy posted losses for the first calendar year in its history. Man says quantitative easing smoothed out market movements to such an extent it was difficult for trends in the futures market to gain momentum. Although long-only funds gained massively in 2009, some long/short funds such as AHL struggled.
Artemis has stuck with SmartGarp, observing that it has performed over longer periods. Man says it has tweaked AHL to reflect the effects of quantitative easing, but otherwise the strategy has remained unchanged.
However, several fund providers have launched strategies that exploit market momentum in completely different ways.
”The professors have invested their own savings and reputation in the vehicle”
Bloxham’s Midas Global Absolute Return fund can exploit not only longer-term trends in global equities, but also short-term oscillations, lasting a matter of days or weeks. In periods of market confusion, where trends or oscillations are slow to emerge, it can move entirely into cash.
By contrast, the Way Hasley Global Momentum fund, which will be launched this week, will invest in equally weighted baskets of developed world equities, but will move into cash if sell signals flash red.
Both funds also rely less on traditional stockpicking and more on technical analysis of the market, which many investors are less familiar with.
The Bloxham fund is based on technical analysis of individual stocks and of the market as a whole. The fund manager, Kevin McConnell, and the head of British distribution at Bloxham, Shane O’Neill, say they are working to educate investors, given the differences between the Midas fund and a more typical retail product.
In the case of Hasley, it is academics, rather than full-time fund managers, who have pioneered the strategy.
Professors Andrew Clare and Stephen Thomas, directors at the Centre for Asset Management Research at Cass Business School in London, advise the Global Momentum fund and have based its design on their academic work.
They have invested their savings and reputation in the vehicle and may launch a multi-asset version if the developed world equity fund is a success.
Ultimately, the proof of whether these funds work better than their predecessors will come not through theory, but practice. Both groups say they have tested both strategies heavily, but the caveat still applies that past performance does not guarantee future returns.