03.31.2015
By Terry Flanagan

Momentum Investing Gathers Steam

Momentum as an investing style, which has been the subject of reams of academic research over the years, is being incorporated into portfolio management with the launch of momentum indices and ETFs by the likes of AQR, Blackrock, MSCI, Russell-Axioma, and others.

“What is interesting is that you see rising interest among asset managers, fund managers and wealth management companies in incorporating momentum factors in the decision-making process,” Rocco Pellegrinelli, CEO of Trendrating, a provider of momentum factor analytics for global investment managers, told Markets Media. “With the launch of specific momentum factor indices, we see a very exciting time.”

Trendrating’s momentum model is designed to capturing medium to long term trends, lasting anywhere from a few months to a few years. The goal is to identify trends early enough to capture up to 66% of price moves, while avoid the “late identification” effect typical of traditional momentum models which are based on 6 or 12 months performance analysis.

“Our model is able to capture those trends that can last for much months up to two years, as in the case of Apple for example, and do that earlier than most of the other legacy models available,” Pellegrinelli said. “Our customers are primarily mutual funds, both active and passive. There’s a big emphasis now particularly in the passive area, to be smart, better, consistent. We also serve hedge funds and wealth managers.”

Pellegrinelli, who began his career as a portfolio manager and investment banker, launched Trendrating 18 months ago to provide easier and more practical ways for portfolio managers to leverage momentum investing.

“It was a long process because we spent more than five years researching indicators,” he said. “Then creating the model, testing across twenty five years of daily data for 20,000 securities, just to make sure that the model was robust enough to be effective. It’s the culmination of more than twenty years of research for me personally and my team.”

Portfolio managers receive immediate feedback on Trendrating results including the average historical accuracy across our letter ratings (A, B, C, and D).

“A stands for a very strong growth trend and D is a very strong bear trend,” said Pellegrinelli. “Another functionality we have is what we call portfolio health check or sanity check. Our customers upload their holdings and monitor on a regular basis variations from expected returns. In particular, they can identify quickly stocks that are starting to move down, and might have a tendency to continue to move downward generating losses.”

Many large fund managers are by switching from a traditional asset allocation approach toward factor-based allocations, whereby they overlay momentum with other factors to enhance returns and mitigate risk.

“Among active mutual funds, we see a number of them interested in adding a momentum analytics layer to the process they have,” said Pellegrinelli. “On the other hand, smart beta people will construct their entire strategy around momentum. Wealth managers are more focused on risk management. The model is flexible and can accommodate different goals and objectives.”

He added, “We’ve started to talk to some of the companies launching multi factor ETFs. Those people are incorporating momentum strategies, and they’re using our technology to design ETF products.”

Legacy momentum models are primary based on 6 month or twelve month horizons. As a result, these models are relatively slow to react. “You are late at identifying turning points,” said Pellegrinelli. “You might enter late in the trend leaving money on the table. On the other hand you might be late in exiting bear market stocks. Our model is more modern and is able to capture reversal in trends.”

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