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Obtaining Positive Alpha in Mid-Cap U.S Equities Using Momentum Strategies!!. Presentation by: J_ SCAD Asset Management Jun Qin Shoaib Mohammed Chris Rudolph Amy Parvaneh Daniel Kuwornu. Agenda. Objective Method Results Conclusions Questions. Objective.
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Obtaining Positive Alpha in Mid-Cap U.S Equities Using Momentum Strategies!! Presentation by: J_ SCAD Asset Management Jun Qin Shoaib Mohammed Chris Rudolph Amy Parvaneh Daniel Kuwornu
Agenda • Objective • Method • Results • Conclusions • Questions
Objective Investigate if pure momentum based strategies in mid-cap stocks can be improved with other univariate factors to increase return in portfolio management • Momentum based strategies are based on the premise that recent strong or weak performance will continue into the next period. • Momentum strategists look at a strong price chart, rapid earnings growth and recent positive changes in earnings growth forecast to make investment decisions based on the above premise. • Which factors or in what combination will lead to higher positive alphas. • Which holding periods eliminates downside risk.
Method • Our procedure is to find the best factors, through the best time frame, to fit each of the following momentum categories. The factors that we initially estimated to be the best were:
Method (Cont.) • Scenario 1: Pure momentum strategy Momentum =+,-5, Other factors =0 • Scenario 2: Modified momentum strategy Momentum = +,-5, Other factors = +,-1 • Scenario 3: Momentum = +5,-3, with subjective factors Other factors:3yr EPS growth, 1yr Price change, Revision Ratio, SUE, BV to Price
Univariate Scoring System Q1 Q5 12 month total return: +5 -3 3 yr EPS growth +5 -5 1 yr price momentum +1 -1 Revision ratio +5 -3 SUE +5 -3 BV to P +5 -3
Equal weighted Value weighted Year 1 2 3 4 5 1 2 3 4 5 145.2 111.5 140.2 116.9 1985 138.1 132.4 124.8 135.9 132.7 129.1 131.9 105.5 131.7 106.6 1986 125.7 120.8 123.6 126.1 123.9 126.1 105.1 95.5 96.3 105.6 1987 104.9 96.1 100.2 105.1 104.0 97.1 128.8 115.5 131.9 117.0 1988 127.0 122.1 119.8 126.1 118.2 121.2 141.2 113.8 146.1 117.1 1989 133.6 125.7 114.8 132.5 126.6 120.4 95.7 83.6 96.4 80.5 1990 90.8 95.1 89.5 89.2 91.2 94.0 168.2 129.7 163.2 130.2 1991 145.4 139.4 144.7 143.4 136.6 141.7 119.9 112.7 118.2 113.3 1992 115.0 119.1 119.5 117.3 114.8 117.3 132.3 116.1 127.1 117.4 1993 123.1 118.1 122.2 121.7 118.6 121.0 103.2 97.5 101.8 95.3 1994 99.6 97.9 99.9 98.3 98.5 98.8 138.5 123.2 135.6 124.4 1995 132.2 126.0 125.7 131.1 126.6 127.5 125.6 113.5 122.4 112.1 1996 122.2 119.0 117.4 121.9 118.9 117.5 127.7 119.0 133.6 117.5 1997 127.5 123.7 124.4 128.8 123.2 122.7 109.2 92.8 112.4 96.2 1998 103.8 99.7 104.3 105.5 101.6 104.6 148.5 112.0 160.4 110.9 1999 120.5 123.6 116.0 125.1 118.0 124.2 90.2 103.0 88.5 104.6 2000 100.9 99.5 100.7 100.6 99.1 101.4 93.5 108.3 91.8 101.4 2001 97.4 98.5 106.0 94.1 99.4 100.7 89.7 68.6 89.9 69.6 2002 87.4 87.2 78.4 86.2 87.4 81.1 143.7 154.4 141.3 152.5 2003 145.7 144.3 146.9 144.2 142.8 146.2 122.3 117.0 123.7 114.8 2004 120.0 122.0 117.5 119.2 123.3 120.1 114.9 102.7 117.8 105.3 2005 114.4 109.3 106.3 117.1 113.1 108.3 Heat Map!
Momentum combined with other unitvariate factors will lead to higher positive alpha in a portfolio management strategy. • The main conclusion of our results is that momentum is a major contributing factor to attaining high alpha in a portfolio management strategy. • Momentum as a sole factor will achieve high returns, but not as high as when combined with other univariate factors in a portfolio management strategy.
Further Research • Snowball effect amongst momentum investors • Investigate different time frames for momentum • Differentiate between mid-cap versus small/large-cap stocks • Momentum strategies in emerging markets and FX
