Tuesday, 29 April 2014

Has the Mo' Train derailed?

Momentum not doing well in recent months

Momentum is an important ingredient of the Mechanical Bull strategy. Along with value and quality it is a key set of factors that underpin Stockopedia's StockRanks. Also, 9 out of Stockopedia's 65 Guru screens are classed as momentum strategies.

These strategies have not done well in recent months. Over the last 3 months only 3 out of these 9 strategies have made gains compared with a 3 per cent rise in the FTSE All Share. Over the last month, they have performed even worse. Only one strategy showed a gain compared with a 1.7 per cent increase for the FTSE All Share.

Doing better over the longer term

The longer term picture looks much better. Over the last year, all 9 momentum strategies have trumped the FTSE All Share. This suggests that momentum strategies are effective over the longer term but that there are periods, such as now, when they will underperform.

I am fairly certain that the derailing of the Mo' Train is the most important factor in explaining the poor performance of the Mechanical Bull portfolio over the last few months. It is down 0.8 per cent over the past month compared to a 1.7 per cent gain for the FTSE All Share.

Lack of any current investment trends

Looking at the performance of Stockopedia's GuruScreen Composite Performance over the past month, momentum strategies are down a dismal 4 per cent. However, it is interesting to see that the FTSE 100 actually beats all other composite strategies during April apart from "value" strategies, which did only slightly better.

This suggests something rather odd is going on with share price movements becoming detached from any underlying investment trends. One possibility is that the very strong performance of these guru screens since the middle of last year has led the markets to look for a reason to cement these gains. The current crisis in the Ukraine might just be such a reason.

The Return of the Mo' Train

So what now for the Mechnical Bull strategy? Although its been two pretty disappointing months in a row, I remain confident in the basic concept. Indeed, what these last few months have shows is that things could easily have been even worse. There is an increased risk when following a single set of investment factors but this can be reduced by combining set of factors.

The Mo' Train may have derailed for a short time but I am confident it will come back on track at some point. Next month will be the one year anniversary since my launch of the Mechanical Bull portfolio. Let's see whether it can end the year on a high.

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