While momentum has been the highest returning factor in the Australian share market over recent years, many Australian equity managers have a strong anti-momentum bias, which has undermined their performance for several years running.
Research we’ve recently conducted on the momentum factors reveals high momentum stocks have outperformed low momentum stocks by 18.4 per cent over the past 10 years to 30 August, 2020, making momentum the highest returning factor in the Australian share market.
Yet Foresight Analytics’ examination of Australian share managers’ sensitivity to momentum factor shows a negatively skewed distribution. In other words, most Australian fund managers are betting against the momentum factor. This bias against momentum has held back significantly the performance of many contrarian managers or value managers.
But first, we need to define momentum and how we measure it. Momentum is a well-known factor that is linked to the investor behavior of trend following or herding. Being a sentiment-based indicator, strong past returns are associated with strong future returns. While momentum can be represented in several ways, Foresight uses price momentum, which has been calculated by 12-month return minus most recent month return.
Using that approach, high momentum stocks have outperformed low momentum stocks by 18.4 per cent p.a. over the past decade to 30 August 2020, placing momentum as the highest returning factor in the Australian share market.
Yet many funds managers are in fact betting against the momentum factor. Foresight’s analysis of 112 large-cap Australian equity managers reveals most have a negative skew to the momentum factor, or negative momentum beta. While several other factors influence the market, this negative momentum bias has provided a strong headwind for many managers’ performance over the past decade.
The distribution of the large-cap equity managers’ momentum contribution to their total return is also negatively skewed, similar to their momentum sensitivity. This means that on average, very few equity fund managers use momentum as a driver for their portfolio return. Funds with lowest sensitivity to momentum include Lazard Select Australian Equity Fund, Ellerston Australian Share Fund, Nikko AM Australian Share Income Fund and Lazard Australian Equity Fund.
In contrast, funds with highest sensitivity to momentum factor include quant-based or systematic strategies from State Street Australian Equity Fund and Platypus Systematic Fund, as the chart below shows. Quant-based managers generally have high exposure to momentum factor as their process explicitly allows for momentum capture. Growth-oriented managers also have higher-than-average beta momentum exposure.
Top 10 Australian large-cap equity funds by momentum beta
Value-based managers have low beta to the momentum factor as their processes explicitly seek beaten down contrarian names. Overall, this bias of fund managers towards momentum cost them active performance drag and was one of the reasons why value-oriented, contrarian managers have underperformed the market.
Bottom 10 Australian large-cap equity funds by momentum beta
Sectors and companies offering momentum
Our research has also revealed that momentum is more relevant in some sectors than others. Among the large-cap sectors, healthcare, consumer cyclicals and non-cyclicals have high momentum while in the small-cap space, technology, and consumer cyclicals dominate a momentum portfolio. Both large-cap and small-cap basic materials sectors have high momentum.
At the security level, momentum is highly dispersed within the large-cap segment. Companies with notable momentum include Afterpay, vaccine leveraged Mesoblast and some securities in the mining sector such as Ramelius, Perseus and Fortescue Metals Group.
In summary, Foresight’s analysis reveals that momentum is still not greatly recognised by investors or asset managers even though it has been one of the key driving factors for over a decade. It remains to be seen if the momentum trend will reverse at some point causing many contrarian or anti-momentum managers to recoup lost performance over the past decade.
Jay Kumar, founder & managing director, Foresight Analytics
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