Value Cashes When Momentum Crashes
- We construct a value-momentum portfolio using a novel approach utilizing the correlation between the rankings of value and momentum signals.
- This rank correlation enables us to form a dynamically weighted value-momentum portfolio that has performed well.
- The logic of why the rank correlation combines value and momentum strategies well is that it underweights momentum when it disagrees with value the most. When this disagreement has been extreme in the past, it has resulted in a momentum “crash.”
- The rank correlation predicts the returns of value and momentum better than the value spread.
The analysis contained in this paper is based on hypothetical modeling. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those shown. Hypothetical or simulated performance results have several inherent limitations. Unlike an actual performance record, simulated results do not represent actual performance and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated performance results and the actual results subsequently achieved by any particular account, product, or strategy. In addition, since trades have not actually been executed, simulated results cannot account for the impact of certain market risks such as lack of liquidity. There are numerous other factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results.
Return assumptions are for illustrative purposes only. Expected return is an estimate of what investments may earn on average over a long-term period. Actual returns may be higher or lower than those shown and may vary substantially over shorter time periods. Return assumptions are subject to change without notice. There is no guarantee that these returns can be realized. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Figures are provided for illustrative purposes and are not indicative of the past or future performance of any PIMCO product.
Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Investments in value securities involve the risk the market’s value assessment may differ from the manager and the performance of the securities may decline.
Momentum relates to using price trends to forecast returns or buying stocks with strong recent performance and selling stocks with weak recent performance based on trends. The correlation of various indexes or securities against one another or against inflation is based upon data over a certain time period. These correlations may vary substantially in the future or over different time periods that can result in greater volatility.
This material contains the current opinions of the manager such opinions are subject to change without notice. This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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