It's been 40 years since ABBA scored a hit with "The winner takes it all". Little did the cult Swedish band know in 1980 that the words they were singing could just as easily be applied to the capital markets ever since. Here too, it is frequently the case that the winners clean up – by which is meant that securities which perform particularly well stay in front for a longer time. It was this recognition that gave birth to the momentum strategy. Also known as a trend-following model, the approach focuses on assets which are on a good run at the time or performing better than the market as a whole. Asset and fund managers have always followed this approach actively. Momentum now also forms a category of its own in the up-and-coming market for smart beta indices. Unlike traditional stock market barometers, these benchmarks are not weighted by capitalisation, with alternative criteria – such as momentum – being the decisive factor instead.
Leonteq has been turning the popular stock market saying "The trend is your friend" into reality with an in-house solution since the end of 2018. The Leonteq Multi Asset Index differs from the bulk of existing trend-following approaches in two central aspects. Firstly, this benchmark is not limited to equity markets but covers multiple asset classes. The investment universe includes property, commodities, bonds and cash as well. Secondly, within the total of five asset classes the index sets the emphasis on Switzerland or an allocation in CHF. The different areas are represented through the use of exchange traded funds (ETFs), the fund currency of which is always the Swiss franc (see illustration). View more information on investment solutions on the topic “Momentum strategy: systematically focusing on the top performers”.
The index is initially divided into twelve units, or "buckets", of equal weighting. Every single one of these has its own yearly adjustment date, on which the relevant bucket invests in the ETF that has enjoyed the best performance over the previous twelve months. The review and allocation of each bucket is staggered by one month (see illustration). This makes it possible to ensure that the trend dominating the markets at the time is followed dynamically and speedily. At the same time, the step-by-step purchase and sale of ETFs is intended to deliver a targeted reduction in volatility. LIXX GmbH is responsible for the review and rebalancing process. The independent service provider also performs the continuous calculation of the index.
It is part of the DNA of the momentum strategy that personal perceptions are ignored. As is well known, psychology can be the greatest enemy of an investor. It is not uncommon, for instance, for investors to be reluctant to invest in securities that are on a good run, so great is their fear of being the last ones to get on board and being hit hard by a possible reversal. Historic considerations make it clear that trends are frequently characterised by astonishing inertia. Take the example of gold: the price of the precious metal has been rising for almost two years. While there have been constant corrections, the upward trend has persisted and recently brought the safe-haven currency to a new all-time high. The Leonteq Multi Asset Index takes the momentum of gold into account. With a weighting of 87%, the iShares Gold CHF Hedged ETF is the absolute heavyweight in the current allocation.