Jason Kephart: Hi, I'm Jason Kephart, alternative strategies analyst at Morningstar, and I'm joined today by Gary Antonacci, author of Dual Momentum Investing.
Gary, thank you so much for joining us today.
Gary Antonacci: My pleasure, Jason.
Kephart: So, Gary, momentum has become kind of a popular factor. Why should it be on investors' radars?
Antonacci: Momentum has been called the premier anomaly by Fama and French. It shows very high returns. More importantly, it's consistent across time and across different assets, and it's held up remarkably well. It's something that anyone can take advantage of and use.
Kephart: So, you take a slightly different approach than just following individual stock price momentum. Can you talk a little bit about how you think about momentum?
Antonacci: Well, stock momentum has some disadvantages having to do with scalability and transaction costs. So I've looked at momentum all different ways and determined in my first research paper that momentum actually works best when applied to indices and asset classes. That's been confirmed by academics. Geczy and Samonov compared momentum across asset classes and compared to stock momentum, and they found that momentum applied to stock indices did the best.
Kephart: So, how many stock indices do you look at?
Antonacci: What I try to do is keep things as simple as possible. So, I can construct a simple momentum model, which is featured in my book that looks only at U.S. stocks and non-U.S. stocks.
Kephart: So, when it comes to measuring momentum, there are a lot of different ways to kind of slice it and dice it. How do you measure momentum? What do you think is the most efficient way to measure momentum?
Antonacci: It's just looking at what's been strongest over the preceding year. So, there's a 12-month look-back which has been discovered in 1937 by two economists, Cowles and Jones, and has held up remarkably well ever since then.
Kephart: And you look at two different measures of momentum, right?
Antonacci: I do.
Kephart: So, what are those two?
Antonacci: Relative strength momentum is where you're comparing one asset to another. Now, that would give you enhanced return. Just switching between U.S. stocks and non-U.S. stocks since 1971 till now would give you an increase in return of 280 basis points per year with very little transacting going on. The problem with relative-strength momentum, or sometimes called cross-sectional momentum, is that it does nothing to attenuate the downside or the drawdown that you would experience. So, for that that you need trend-following approach, which is, absolute momentum or time series momentum, where you're looking at the performance of an asset itself over time. For example, if the S&P 500 has been up over the preceding 12 months, you would say that it has positive absolute momentum, and it should continue going up since momentum means persistence in performance.
Kephart: So, does combining those two momentums kind of offset the risk of the big drawdowns that we sometimes see in momentum when things reverse?
Antonacci: It has since 1971. It's mitigated every drawdown. When you combine absolute and relative momentum together, your drawdown is reduced almost by two thirds, your maximum drawdown. And your return is enhanced as well, considerably.
Kephart: How would you recommend investors use this momentum strategy in a portfolio? I mean, would you recommend using as a whole portfolio or as a slice of a portfolio?
Antonacci: It depends on what they become comfortable with. The more they find out about it and understand it, the more confident they may be to utilize it as a core holding. Other people use it as a satellite to what they have going on.
Kephart: And momentum is just one factor. Are there other factors that you've looked at that you've found are noteworthy or that--value is obviously one that people generally talk about combining with momentum.
Antonacci: I haven't found anything that's comparable to momentum in terms of reward-to-risk relationship. I've found that you'd really don't need anything else, although you can use some factors along with momentum. As I mentioned before, I'll use U.S. stocks and non-U.S. stocks. Well, in the U.S. market there are different factors you can use with that. But you have to be selective because not every one of them responds as well to trend-following. Value, for example, does not respond as well as some of the other factors do.
Kephart: Great. Well, thank you so much for joining us, Gary.
Antonacci: My pleasure, Jason.
Kephart: With Morningstar, I'm Jason Kephart.