Dual Momentum Investing. Gary Antonacci Portfolio Management Consultants

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1 Dual Momentum Investing Gary Antonacci Portfolio Management Consultants

2 Gary Antonacci Over 4 years experience with underexploited investments first place winner of the NAAIM Wagner Award Author of Dual Momentum Investing: An Innovative Approach to Higher Returns with Lower Risk

3 Topics for Today What is momentum? Why does it work? What are its issues? How to best use it?

4 What is Momentum?

5 Sir Isaac Newton (643-) A body in motion tends to stay in motion.

10 David Riccardo (-3) Cut your losses short, and let your profits run on. The Great Metropolis, 3

11 Jesse Livermore and Richard Wyckoff

12 Modern Momentum Alfred Cowles III & Herbert Jones Econometrica, July 3 NYSE stocks from -35

13 Stocks that have exceeded the median in one year exceed it also in the following year. Cowles & Jones

14 Random Walk Hypothesis

15 Efficient Market Hypothesis

16 Academics Begin to See the Light

17 Behavioral finance -

18 Behavioral finance - Mean reversion,

19 Behavioral finance - Mean reversion, Value and size factors

20 Jegadeesh & Titman Seminal 3 study using 6 to US stock data

21 Jegadeesh & Titman Seminal 3 study using 6 to US stock data Deciles ranked by momentum

22 Jegadeesh & Titman Seminal 3 study using 6 to US stock data Deciles ranked by momentum 3 to month momentum works!

23 U.S. Stock Momentum Top and bottom %, months - momentum Jan -Dec 4, rebalanced monthly Winner Loser SP5 CAGR.% -.5%.% Standard Deviation.6% 33.%.% Downside Deviation 6.%.% 4.% Sharpe Ratio Worst Drawdown -.% -.% -4.6% Source: Ken French Data Library and Standard & Poor s. Results are hypothetical, and are NOT an indicator of future results, and do NOT represent returns that any investor actually attained.

24 Momentum works well with stocks, stock indices, sectors, bonds, commodities, and currencies from until now!

25 Multi-Asset Class Momentum by Decade Source: Geczy and Samonov (5), 5 years of Global Multi-Asset Momentum: -4

26 Source: Geczy and Samonov (5), 5 years of Global Multi-Asset Momentum: -4

27 WHY MOMENTUM WORKS

28 Underreaction and Overreaction

29 Initial Underreaction Anchoring/Conservatism

30 Initial Underreaction Anchoring/Conservatism Slow diffusion of information

31 Initial Underreaction Anchoring/Conservatism Slow diffusion of information Disposition effect

32 Herding Later Overreaction

33 Later Overreaction Herding Recency bias

34 Later Overreaction Herding Recency bias Overconfidence

35 Systematic Momentum High and consistent returns Has persisted over time Works with all assets Good reasons for it

36 Fama & French The premier market anomaly is momentum. Dissecting Anomalies Journal of Finance, July

37 Want To Do Stock Momentum?

38 Stock momentum is persistent, pervasive, robust, and intuitive but is it investable?

39 Scalability 5 Stock Portfolio Stock Portfolio 5 Stock Portfolio Stock Portfolio 5 Stock Portfolio 3 Stock Portfolio 5 Stock Universe month hold.% 4.4% 3.6%.%.%.5%.% month hold 6.% 4.% 3.%.6%.%.4%.% 3 month hold 5.% 3.%.%.3%.%.%.% 4 month hold 4.5% 3.5%.%.%.6%.%.% 5 month hold 4.4% 3.3%.6%.%.6%.%.% 6 month hold 3.% 3.%.4%.%.5%.%.% month hold 3.%.%.%.%.3%.%.% month hold 3.4%.6%.%.5%.%.%.% month hold.%.%.6%.%.%.%.% month hold.6%.%.4%.%.%.%.% month hold.%.6%.%.%.%.5%.% month hold.%.3%.%.6%.5%.4%.% Results are hypothetical, and are NOT an indicator of future results, and do NOT represent returns that any investor actually attained. Please see disclosures for additional information.

40 the abnormal returns associated with these trading strategies creates an illusion of profit opportunities when, in fact, none exists. -Lesmond, Schill & Zhou () The Illusionary Nature of Momentum Profits

41 the abnormal returns associated with these trading strategies creates an illusion of profit opportunities when, in fact, none exists. -Lesmond, Schill & Zhou () The Illusionary Nature of Momentum Profits as much as $5 billion may be invested in some momentum-based strategies before the opportunity profit vanishes. -Korajcyzk & Sadka (4) Are Momentum Profits Robust to Trading Costs?

42 Source: Novy-Marx and Velikov (5), A Taxonomy of Anomalies and their Trading Costs

43 Source: Beck, Hsu, Kalesnik & Kostka (6), Will Your Factor Deliver? An Examination of Factor Robustness and Implementation Costs?

44 Oldest Momentum Funds

45 PowerShares DWA Momentum

46 AQR Large Cap Momentum

47 Stock Momentum Fund Performance Annual Returns from Inception to Jan PowerShares DWA Momentum 6.3% Russell 3 Growth Index.4% Difference -.% AQR Large Cap Momentum 4.3% Russell Growth Index 5.% Difference -.5%

48 Want To Do Stock Momentum?

49 So What To Do?

51 World Stock Market Capitalization

52 Relative Momentum Switch between the S&P 5 and the MSCI All Country World Index (ACWI) ex-us Monthly rebalancing, -month look back

53 base = Relative Momentum S&P 5 MSCI ACWI ex-us

54 Vertical Diversification S&P 5 55% always MSCI ACWI ex-us 45% always

55 Horizontal Diversification S&P 5 MSCI ACWI ex-us 55% of the time 45% of the time

56 Global Macro Strategy

57 Global Macro Strategy

58 base = Relative Momentum S&P 5 MSCI ACWI ex-us

59 base = Relative Momentum S&P 5 MSCI ACWI ex-us

60 Behavioral Gaps

61 Source: Dalbar, Inc, Quantitative Analysis of Investor Behavior

62 We don t have people with investment problems. We have investments with people problems. -Gregg Fisher

63 Bonds

64 Source: Credit Suisse Global Investment Returns Yearbook 5

65 Stock and Bond Risks Source: Credit Suisse Global Investment Returns Yearbook 5

66 Two Types of Momentum Relative (cross-sectional) compare performance to our peers Absolute (time-series) compare performance to our self

67 Absolute Momentum Switch between the S&P 5 and the Barclays US Aggregate Bond index Monthly rebalancing, -month look back

68 base = S&P 5 Absolute Momentum S&P 5 Aggregate Bonds

69 . S&P 5 Abs Mom S&P Data is from Standard and Poor s and Ibbotson Associates. Results are hypothetical, and are NOT an indicator of future results, and do NOT represent returns that any investor actually attained.

70 Worst S&P 5 Drawdowns January December 6 Date S&P 5 S&P 5 Abs Mom Jul -Feb -5.% +5.% Apr -Sep -43.% +.4% Jan 3-Sep 4-4.% +.% Mar 3-Mar 3-5.% -.4% Sep -Jun 3-3.4% -.% Results are hypothetical, are NOT an indicator of future results, and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.

71 S&P 5 Trend Up versus Trend Down Jan -Dec 6 All Months Trend Up Trend Down Average Annual Return.% 4.%.% Standard Deviation.% 4.% 4.% % of Months % 66% 34% Results are hypothetical, are NOT an indicator of future results, and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.

72 Momentum Since 3, Really! Source: Greyserman and Kaminski, Trend Following with Managed Futures, John Wiley & Sons, Inc, 4

73 Absolute Momentum and Moving Averages Zakamulin study on 55 years of S&P data: Absolute Momentum (MOM) Simple Moving Average (SMA) Reverse Exponential Moving Average (REMA) Double EMA Crossover Method (DCM) Source: Zakamulin (5), A Comprehensive Look at the Empirical Performance of Moving Average Trading Strategies

74 Absolute Momentum and Moving Averages CONCLUSIONS: Best performing method: MOM Worst performing method: DCM Only MOM & REMA are statistically significant Source: Zakamulin (5), A Comprehensive Look at the Empirical Performance of Moving Average Trading Strategies

75 Dual Momentum Absolute momentum switches between stocks and bonds Relative momentum switches between the S&P 5 and the ACWI ex-us Monthly rebalancing, -month look back

76 base = Dual Momentum Relative Momentum Absolute Momentum S&P 5 MSCI ACWI ex-us

77 Dual Momentum Jan - Dec 6 CAGR Standard Deviation Sharpe Ratio Worst Drawdown Dual Momentum.%.5%. -.% Absolute Momentum.%.% % Relative Momentum 3.5% 5.% % S&P 5 Index.% 5.%.4-5.% MSCI ACWI ex-u.s..%.%.3-5.4% Results are hypothetical, are NOT an indicator of future results, and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.

78 Bull Markets Bull Markets S&P 5 Abs Mom Dual Mom Jan -Dec 36.% 3.6% 65.6% Oct 4-Nov.3%.6% 3.3% Aug -Aug.% 46.3% 56.% Dec -Aug 6.6%.4% 3.5% Oct -Oct.3%.4%.6% Mar -Jul5.% 36.% 6.4% Average.%.%.% Results are hypothetical, are NOT an indicator of future results, and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.

79 Bear Markets Bear Markets S&P 5 Rel Mom Dual Mom Jan 3-Sep 4-4.6% -35.6% 5.% Dec -Jul -6.5% -6.% 6.% Sep -Nov -.6% -5.% -5.% Sep -Sep -44.% -43.4% 4.% Nov -Feb -5.% -54.6% -3.% Average -36.% -33.% 3.6% Results are hypothetical, are NOT an indicator of future results, and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.

81 Advantages of Dual Momentum Extensively Researched High Expected Returns High Scalability Low Trading Costs Low Drawdowns

82 Why Isn t Everyone Doing It?

83 Too Simple

85 Counter Intuitive

86 Other Behavioral Biases Familiarity Bias Anchoring/Conservatism Slow diffusion of information Preference for stocks not indices

87 WHY WE NEED TO OVERCOME

88 Investment Allocations

89 Investment Allocations

91 55 Which Do You Want? base = Dual Momentum Treasury Bills 5

92 Risks?

93 Tracking Error

94 Whipsaws

97 Patience

98 Discipline

99 Understanding

100 Dual Momentum Investing USA Best Book Award Over 5 5 Star Reviews Easy D-I-Y Instructions

101

102 The most important metric is not the returns achieved but the returns weighed against the risks incurred. Nothing should be more important than the ability to sleep soundly at night. -Seth Klarman

103

104 May the Momentum Be With You!

105 Disclosures This presentation is for educational and informational purposes only. Nothing contained therein should be interpreted as personalized investment advice. Under no circumstances does this information represent a recommendation to buy, sell or hold any security. Users should be aware that all investments carry risk and may lose value. Users of these sites are urged to consult their own independent financial advisors with respect to any investment. We are not liable for any errors or inaccuracies, regardless of cause, or for the delay or interruptions in the transmission of information to our users. Opinions and analysis included therein are based on sources believed to be reliable and written in good faith, but no representation or warranty is made as to their accuracy, completeness, or timeliness. You should always obtain your own current information and perform due diligence before making any investment decisions. All performance represents total returns and includes reinvestment of interest and dividends but does not reflect management fees, transaction costs, taxes, or other expenses. You cannot invest directly in indexes. Future performance of these models may differ significantly from historical performance. Hypothetical performance results are presented for illustrative purposes only and should not be interpreted as an indication of future performance. Hypothetical performance results (e.g., quantitative back tests) have many inherent limitations, some of which, but not all, are described herein. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses can adversely affect actual trading results. The hypothetical performance results contained herein represent the application of the quantitative models as currently in effect, and there can be no assurance that the models or portfolio constituents will remain the same in the future or that an application of the current models in the future will produce similar results because the relevant market and economic conditions that prevailed during the hypothetical performance period will not necessarily recur. The term maximum drawdown as used on this site refers to means the maximum cumulative peak-to-valley retracement on a month-end basis. Intra-month maximum drawdowns may be substantially higher, and future maximum drawdowns may be higher still. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, all of which can adversely affect actual trading results.

106 Gary Antonacci Portfolio Management Consultants website: optimalmomentum.com blog: dualmomentum.net

MOMENTUM INVESTING: SIMPLE, BUT NOT EASY

MOMENTUM INVESTING: SIMPLE, BUT NOT EASY As Of Date: 9/5/2018 Wesley R. Gray, PhD T: +1.215.882.9983 F: +1.216.245.3686 ir@alphaarchitect.com 213 Foxcroft Road Broomall, PA 19008 Empower Investors Through