Four years ago some of Britain’s biggest housebuilders were marked down as bargain bucket stocks that only hardened value investors would buy. Since then, of course, the price of shares in companies like Persimmon, Barratt Developments and Bovis Homes have soared. These shares have been a textbook example of how Value and Momentum can complement each other to keep prices rising for long periods. It’s a crossover investing strategy used by some of the world’s most respected systematic hedge funds. It is also at the core of the Stockopedia StockRanks that have been producing some eye-catching returns in the UK market in 2015.
Competing strategies
On paper, value and momentum are styles that seem completely at odds with one another. On one hand, value junkies recoil at the idea of chasing rising prices, especially in stocks that already look expensive. On the other, momentum hunters balk at the prospect of digging around for underpriced shares in the hope they’ll rebound.
But the merits of combining both is backed by extensive research. Josef Lakonishok, an academic-turned-fund manager, spent years studying investor behaviour and the relationship between value and momentum. His work led to what is now a $90bn fund firm that specifically looks for undervalued shares just at the moment the market is starting to notice them.
Another research-driven quant fund manager is Cliff Asness at AQR Capital. In a paper called Value and Momentum Everywhere, his team pointed out that the negative correlation between the two factors means that when one falters the other will fly. And that means a smoother, less volatile performance than you get from either factor on its own.
More recently, fund manager Patrick O’Shaughnessy looked at how pure momentum strategies got badly hit in the US market during 2014. He finds that adding value or quality factors to momentum can work very well in avoiding the glamour shares that get crushed quickest when momentum stalls.
Screening for VM shares
At Stockopedia we rank every company in the market for their quality, value and momentum characteristics, and one of the ranks we track is Crossover Value + Momentum.
Since April 2013, a quarterly rebalanced portfolio of £10m+ companies in the top 10% of the market based on the V+M Rank has produced a return of 63.1%. Since the turn of the year, the portfolio…
