01 Apr Learning From PowerShares' "Smart Beta Momentum Investing"
The paper explores when Relative Momentum investing works best and when it underperforms. Relative Momentum can be applied in a variety of ways.
In this article, Absolute Momentum will be used interchangeably with trend following or time series momentum. Relative Momentum will be used interchangeably with cross-sectional momentum or relative strength.
Relative Momentum investing works best when there is a low price correlation between assets. Relative Momentum has also performed well during periods of economic expansion, narrowing credit spreads and rising interest rates.
Relative Momentum can underperform during periods of economic contraction, declining stock markets, tightening credit spreads and falling interest rates. A high correlation between assets can reduce the usefulness of Relative Momentum investing. A sudden change in economic fundamentals causing sharp price reversals is detrimental to Relative Momentum. Relative Momentum might also entice investors to buy assets which are over-valued.
Relative Momentum can be used in a variety of ways. It can be applied on individual stocks and sectors. It can be applied on different asset classes during asset allocation process. Momentum factor can be combined with other factors such as Value. A portfolio can be weighted by Momentum instead of Market Capitalization.
Research Paper: Smart Beta Momentum Investing
Authors: Invesco PowerShares Capital Management
Company: Invesco PowerShares Capital Management