When Growth Beats Value : Removing Tail Risk From Global Equity Momentum Strategies

We investigate the relationship between Value, Growth and two forms of Momentum across a wide range of developed and emerging international equity markets using MSCI total return ‘smart beta' indices. As would be anticipated, Value generally beats Growth. A distinction is then made between relative momentum where assets are ranked according to their performance against each other, and absolute momentum (sometimes known as trend following) where assets are categorized according to whether they have recently exhibited positive nominal return characteristics. We find that both Value and Growth portfolios benefit from momentum filters but particularly the latter, though they do suffer from familiar equity market volatility, skewness and substantial drawdowns. When we overlay simple absolute momentum on these factor indices, it typically delivers a much more favourable investment performance than relative momentum with considerably lower volatility and smaller drawdowns. Well-known behavioural finance biases help us understand such behaviour