Growth Momentum Investment Strategy

Growth Momentum Investment Strategy

“Though known to financial academics for many years, momentum is for most investors the “undiscovered style,” a valuable tool in building diversified portfolios with above-average returns.”(1) 

After reviewing the following information, please contact us with any questions. 

FBB Capital Partners takes a unique approach to growth-oriented investments.  We blend traditional fundamental factors such as revenue growth and profit margin expansion with a bias toward companies showing relative price strength to the market, or ‘momentum.’ 

Momentum is the tendency of securities to display persistence in their relative performance.  For example, stocks that have performed relatively well often continue to exhibit strength, while those that have underperformed often continue to disappoint. 

As aforementioned, academic and practitioner research has confirmed the presence of momentum as a factor in the securities markets.  The evidence points to momentum being a phenomenon driven by investor behavior: slow reaction to new information, asymmetric responses to winning and losing investments, the ‘bandwagon’ effect. 

FBB’s Growth Momentum Strategy: Investment Philosophy

By combining essential operating gauges with a price momentum approach, we believe a diversified portfolio of high-quality securities may deliver the opportunity of higher risk-adjusted returns.  Ideal securities making up the Growth Momentum portfolio have consistent and expanding business fundamentals, increasing investor enthusiasm, and sponsorship.  These companies typically exhibit a rising number of analyst upgrades and increases in earnings estimates, along with relatively strong price performance. 

Quantitative Structure

“…we slavishly follow the model.  You do whatever it says no matter how smart or dumb you think it is.” – Jim Simons, Renaissance Technologies 

A not uncommon problem for investors and investment managers, in general, is the tendency to deviate from a strategy or investment approach during periods of market dislocation or changes in the investment environment.  This “style drift” can lead a manager to abandon an approach with positive expectancy and has been effective in the past at the most inopportune time.  FBB believes the tendency to shift approach in security selection or portfolio constructions should be avoided. 

Similarly, we believe that a strategy designed to capture systematic biases in and of itself should be free from bias.  As such, the Growth Momentum strategy utilizes quantitative methods in selecting securities for inclusion in the portfolio and determining the makeup of the portfolio.  Using a robust, quantitative methodology, the metrics and their application provide discipline and adherence to style vital to capturing performance. 

Rebalancing and Money Management

Investors may be familiar with the concept of rebalancing their portfolio to reduce risk and/or adjust their allocation at various times.  For the Growth Momentum portfolio, rebalancing means regularly scanning the market to identify new opportunities in securities as they arise.  Given the dynamic nature of relative performance among securities, scanning and entering new trades is vital to achieving a portfolio tilted towards momentum. 

In their groundbreaking book, Active Portfolio Management: A Quantitative Approach for Producing Superior Returns and Controlling Risk, Richard Grinold and Ronald Kahn make the case, in essence, a methodology that shows positive expectancy, an investor, should take as many bets and as often as possible.  The reasoning is that given the random distribution of a line of returns, the odds of a successful outcome increase the more opportunities (or bets).  The FBB Growth Momentum strategy incorporates this by the periodic rebalancing of securities in the portfolio. 

Investor Considerations

FBB Capital’s Growth Momentum Strategy seeks to achieve above-average capital appreciation by investing in equities.  Current income is of minor importance, and year-to-year market values may fluctuate substantially.  An investment time horizon of five years or more is strongly recommended, which we believe will allow the investor to participate in various market cycles for maximum growth potential. 

  • Differences between the portfolio and traditional strategies may include, but are not limited to: 
  • Frequent portfolio rebalancing and a relatively high turnover rate may involve a substantial number of short-term investments. 
  • The portfolio may, at times, hold larger relative cash positions given changes in the market environment. 
  • The Growth Momentum strategy is generally less tax-efficient than FBB’s other strategies and could lead to a high degree of short-term capital gains if this approach is used in accounts that are not tax-advantaged. 

The strategy is typically suitable for a portion of a client’s total portfolio or clients with an objective of Capital Appreciation and a tolerance for its corresponding level of risk. Given the functional elements of implementing the strategy, including regular periodic rebalancing, a dedicated account (preferably tax-deferred) is required.  Also, given the strategy’s systematic nature, client-directed investment restrictions are not available for this strategy. 

 

The Case for Momentum Investing, Adam L. Berger, et al., AQR Capital Management. (2009) 
Growth Momentum Investment Strategy

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