Roger Federer once again has momentum on his side. At the beginning of the month, the tennis superstar won the 101st ATP tournament of his career in Miami. That puts the native of Basel back up to 4th place in the world rankings. On 8 April Federer had been in the top 100 players for a total of 1,020 weeks, thereby taking the record previously held by the American Andre Agassi. In May Roger Federer will be appearing at the Madrid Open and, if his current momentum continues, the 37-year-old will be capable of anything in the clay court season, too. It is not only in sport that the term “momentum” is widely used, though: it is also part and parcel of capital investments. Momentum or trend tracking strategies are focused on assets that are on a run at the moment and performing better than the market as a whole.
Behind this approach is the historic observation that trends exhibit certain inertia. They can therefore continue over a long period. As the saying goes, “winners remain winners - for now”. In the momentum strategy, then, strong stocks are bought or their weightings increased, while underperformers are booted out of the portfolio. The real skill likes in distinguishing one class from the other. Is there actually a clear and sustainable upward trend, or is this just a flash in the pan? To answer this question, professional investors resort to a range of parameters. While some rely on chart technology, for instance, others put their trust in complex algorithms. Either way, the rules-based procedure offers a key advantage: in the momentum strategy, the emotions of the investor are ignored. It is well known that feelings have lost nothing on the stock market; indeed, they are the investor’s greatest enemy. View more information on investment solutions on the topic “Momentum Strategy: Turning the focus onto the strongest investments”.
Alongside active fund or asset managers, many indices are now putting this success model into practice. In this context frequent mention is made of smart beta or factor investing. Such benchmarks differ from the traditional weighting based on market capitalisation; they are instead governed by certain factors, such as momentum. The thinking behind this approach is that it ensures the best possible consideration of risk premiums and allows disproportionately higher returns relative to the market as a whole to be achieved. The last few years have been something of a golden age for momentum strategies, especially those wrapped in Exchange Traded Funds (ETFs). They generally follow an international approach. Following the much-quoted stock market aphorism that “The trend is your friend”, the momentum benchmarks look worldwide, in Europe or on Wall Street for stocks offering the richest prospects. They also generally tend to focus on equity markets.
To that extent the Leonteq Multi Asset Index can certainly be regarded as innovative. This new momentum strategy turns its focus onto the Swiss capital market. It also tracks the price trends in five different asset classes: real estate, commodities, equities, bonds and cash. ETFs are used for the practical implementation of this intelligent method. To that end an index fund denominated in Swiss francs was selected for each asset class (see illustration). To allow for the sometimes considerable movements on the stock market, the allocation is rejigged every month, with the Leonteq Multi Asset Index increasing the proportion of those ETFs that have delivered the best performance over the last 12 months. A rolling mechanism ensures that the prevailing trend is captured speedily while volatility is kept as low as possible.
View more information on investment solutions on the topic “Momentum Strategy: Turning the focus onto the strongest investments”.