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The Wisdom of Herds

Following momentum's 2010 comeback, is there a role for the tactic in your portfolio?

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Despite ample evidence that momentum-based strategies can work, fundamentally focused investors can sometimes be dismissive of them. Facts can be stubborn, though. After taking a drubbing during the 2008 debacle and, in relative terms, 2009 as well, the strategy returned to historical form in 2010, with each of AQR's momentum-based indexes--U.S. Large Cap, U.S. Small Cap, and International--besting their relevant, market-cap-weighted counterparts by significant margins.

Launched in July 2009, moreover, the shop's AQR Momentum (AMOMX) delivered a strong first full calendar year, too, surpassing the large-growth category norm by more than 3 percentage points en route to a gain of 18.6%.

Rewards ...
Momentum gets a bad rap in part because it seems too easy. Rather than poring over a company's financials, assessing its executives, and constructing elaborate valuation models, momentum investors ask a single question--what's working now?--and invest accordingly. There are variations on the approach--some momentum strategies incorporate earnings data and relative strength among their criteria--but one remarkably simple tack has enjoyed remarkable success.

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Shannon Zimmerman does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.