Practical Applications of When Growth Beats Value: Applying Momentum Filters to Growth and Value Portfolios

Practical Applications Summary

In When Growth Beats Value: Applying Momentum Filters to Growth and Value Portfolios, in the August 2019 edition of The Journal of Investing, Andrew Clare, James Seaton, and Stephen Thomas, all of ass Business School, City University, and Peter N. Smith of the University of York analyze momentum investing and whether simple adaptations of momentum factors can augment the performance of growth and value portfolios. They compare the returns from applying momentum-based trading rules to developed and emerging markets and to growth- and value-oriented investing. The crux of their article is a distinction between relative momentum, which ranks assets based on their performance against one another, and absolute momentum, which ranks assets based on whether they have displayed recent positive returns.

The authors find that the performance gap between buying and holding a value portfolio over a growth portfolio shrinks after the application of a relative-momentum filter. They note that growth investing can generally outperform comparable value and conventional buy-and-hold strategies when investors use momentum-based rules, though value strategies can benefit as well. Trend following in particular offers significant benefits over a buy-and-hold strategy. The authors additionally find that absolute-momentum overlays deliver better returns overall than relative-momentum ones (except in the case of developed-market growth stocks), along with lower volatility and smaller drawdowns.