International Momentum Strategies (Part 2)

An academic paper read by Sawyer Investment Management Company regarding the performance of momentum strategies in international equity markets. (Part 2)

Abstract:
International equity markets exhibit medium-term return continuation. Between 1980 and 1995 an internationally diversified portfolio of past medium-term Winners outperforms a portfolio of medium-term Losers after correcting for risk by more than 1 percent per month. Return continuation is present in all twelve sample countries and lasts on average for about one year. Return continuation is negatively related to firm size, but is not limited to small firms. The international momentum returns are correlated with those of the United States which suggests that exposure to a common factor may drive the profitability of momentum strategies.

Citation:
ROUWENHORST, K. G. (1998). International Momentum Strategies. Journal of Finance, 53(1), 267–284.

Link to Paper:
http://landryinvest.ca/documents/articles/rouwenhorst_momentum_strategies.pdf

About Sawyer Investment Management Company:
SIMCO is a Texas-registered Investment Adviser with its principal place of business in Dallas, Texas. It was formed on January 1, 2015 and is wholly owned by Ryan Sawyer, who is a CFA Charterholder and a Certified Public Accountant.

SIMCO specializes in the construction of equity portfolios, and is therefore an ideal resource for long-term investors. The firm goes through a rigorous process for selecting each and every holding in the portfolio. Rooted in the empirical research of academia, the portfolios are generally characterized as large-cap value momentum. For more information about how the portfolios are managed, see our website.

www.sawyerinvestment.com
https://www.facebook.com/Sawyer-Investment-Management-Company-1588110057913467/
https://twitter.com/SawyerInvest
https://sawyerinvestment.blogspot.com/

International Momentum Strategies (Part 1)

An academic paper read by Sawyer Investment Management Company regarding the performance of momentum strategies in international equity markets. 

Abstract:
International equity markets exhibit medium-term return continuation. Between 1980 and 1995 an internationally diversified portfolio of past medium-term Winners outperforms a portfolio of medium-term Losers after correcting for risk by more than 1 percent per month. Return continuation is present in all twelve sample countries and lasts on average for about one year. Return continuation is negatively related to firm size, but is not limited to small firms. The international momentum returns are correlated with those of the United States which suggests that exposure to a common factor may drive the profitability of momentum strategies.

Citation:
ROUWENHORST, K. G. (1998). International Momentum Strategies. Journal of Finance, 53(1), 267–284.

Link to Paper:
http://landryinvest.ca/documents/articles/rouwenhorst_momentum_strategies.pdf

About Sawyer Investment Management Company:
SIMCO is a Texas-registered Investment Adviser with its principal place of business in Dallas, Texas. It was formed on January 1, 2015 and is wholly owned by Ryan Sawyer, who is a CFA Charterholder and a Certified Public Accountant.

SIMCO specializes in the construction of equity portfolios, and is therefore an ideal resource for long-term investors. The firm goes through a rigorous process for selecting each and every holding in the portfolio. Rooted in the empirical research of academia, the portfolios are generally characterized as large-cap value momentum. For more information about how the portfolios are managed, see our website.

www.sawyerinvestment.com
https://www.facebook.com/Sawyer-Investment-Management-Company-1588110057913467/
https://twitter.com/SawyerInvest
https://sawyerinvestment.blogspot.com/

Kalok Chan, Hameed, A., & Tong, W. (2000). Profitability of Momentum Strategies in the International Equity Markets.

An academic paper read by Sawyer Investment Management Company regarding the results of using momentum strategies with market indices outside of the US.

Abstract:
This paper examines the profitability of momentum strategies implemented on international stock market indices. Our results indicate statistically significant evidence of momentum profits. The momentum profits arise mainly from time-series predictability in stock market indices--very little profit comes from predictability in the currency markets. We also find higher profits for momentum portfolios implemented on markets with higher volume in the previous period, indicating that return continuation is stronger following an increase in trading volume. This result confirms the informational role of volume and its applicability in technical analysis.

Citation:
Kalok Chan, Hameed, A., & Tong, W. (2000). Profitability of Momentum Strategies in the International Equity Markets. Journal of Financial & Quantitative Analysis, 35(2), 153–172.

Link to Paper:
https://www.jstor.org/stable/2676188?read-now=1&seq=19#metadata_info_tab_contents

About Sawyer Investment Management Company:
SIMCO is a Texas-registered Investment Adviser with its principal place of business in Dallas, Texas. It was formed on January 1, 2015 and is wholly owned by Ryan Sawyer, who is a CFA Charterholder and a Certified Public Accountant.

SIMCO specializes in the construction of equity portfolios, and is therefore an ideal resource for long-term investors. The firm goes through a rigorous process for selecting each and every holding in the portfolio. Rooted in the empirical research of academia, the portfolios are generally characterized as large-cap value momentum. For more information about how the portfolios are managed, see our website.

www.sawyerinvestment.com
https://www.facebook.com/Sawyer-Investment-Management-Company-1588110057913467/
https://twitter.com/SawyerInvest
https://sawyerinvestment.blogspot.com/

Momentum Strategies (Part 2)

An academic paper read by Sawyer Investment Management Company regarding the effects of price momentum and earnings momentum on stock returns (Part 2)

Abstract:
We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular to past earnings news. Past return and past earnings surprise each predict large drifts in future returns after controlling for the other. Market risk, size, and book-to-market effects do not explain the drifts. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information.

Citation:
Chan, L. K. C., Jegadeesh, N., & Lakonishok, J. (1996). Momentum Strategies. Journal of Finance, 51(5), 1681–1713.

Link to Paper:
https://kantakji.com/media/174618/file1391.pdf

About Sawyer Investment Management Company:
SIMCO is a Texas-registered Investment Adviser with its principal place of business in Dallas, Texas. It was formed on January 1, 2015 and is wholly owned by Ryan Sawyer, who is a CFA Charterholder and a Certified Public Accountant.

SIMCO specializes in the construction of equity portfolios, and is therefore an ideal resource for long-term investors. The firm goes through a rigorous process for selecting each and every holding in the portfolio. Rooted in the empirical research of academia, the portfolios are generally characterized as large-cap value momentum. For more information about how the portfolios are managed, see our website.

www.sawyerinvestment.com
https://www.facebook.com/Sawyer-Investment-Management-Company-1588110057913467/
https://twitter.com/SawyerInvest
https://sawyerinvestment.blogspot.com/

Momentum Strategies

An academic paper read by Sawyer Investment Management Company regarding the effects of price momentum and earnings momentum on stock returns.  (Part 1)

 Abstract:
We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular to past earnings news. Past return and past earnings surprise each predict large drifts in future returns after controlling for the other. Market risk, size, and book-to-market effects do not explain the drifts. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information.

Citation:
Chan, L. K. C., Jegadeesh, N., & Lakonishok, J. (1996). Momentum Strategies. Journal of Finance, 51(5), 1681–1713.

Link to Paper:
https://kantakji.com/media/174618/file1391.pdf

About Sawyer Investment Management Company:
SIMCO is a Texas-registered Investment Adviser with its principal place of business in Dallas, Texas. It was formed on January 1, 2015 and is wholly owned by Ryan Sawyer, who is a CFA Charterholder and a Certified Public Accountant.

SIMCO specializes in the construction of equity portfolios, and is therefore an ideal resource for long-term investors. The firm goes through a rigorous process for selecting each and every holding in the portfolio. Rooted in the empirical research of academia, the portfolios are generally characterized as large-cap value momentum. For more information about how the portfolios are managed, see our website.

www.sawyerinvestment.com
https://www.facebook.com/Sawyer-Investment-Management-Company-1588110057913467/
https://twitter.com/SawyerInvest
https://sawyerinvestment.blogspot.com/

Profitability of Momentum Strategies: An Evaluation of Alternative Explanations (Part 2)

An academic paper read by Sawyer Investment Management Company regarding the source of momentum returns. (Part 2)

Abstract:
This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990s, suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions that are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution.

Citation:
Jegadeesh, N., & Titman, S. (2001). Profitability of Momentum Strategies: An Evaluation of Alternative Explanations. Journal of Finance, 56(2), 699–720.

Link to Paper:
http://www.trendrating.com/wp-content/uploads/white-papers/profitability_of_momentum_strategies.pdf

About Sawyer Investment Management Company:
SIMCO is a Texas-registered Investment Adviser with its principal place of business in Dallas, Texas. It was formed on January 1, 2015 and is wholly owned by Ryan Sawyer, who is a CFA Charterholder and a Certified Public Accountant.

SIMCO specializes in the construction of equity portfolios, and is therefore an ideal resource for long-term investors. The firm goes through a rigorous process for selecting each and every holding in the portfolio. Rooted in the empirical research of academia, the portfolios are generally characterized as large-cap value momentum. For more information about how the portfolios are managed, see our website.

www.sawyerinvestment.com
https://www.facebook.com/Sawyer-Investment-Management-Company-1588110057913467/
https://twitter.com/SawyerInvest
https://sawyerinvestment.blogspot.com/

Profitability of Momentum Strategies: An Evaluation of Alternative Explanations

An academic paper read by Sawyer Investment Management Company regarding the source of momentum returns.

Abstract:
This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990s, suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions that are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution.

Citation:
Jegadeesh, N., & Titman, S. (2001). Profitability of Momentum Strategies: An Evaluation of Alternative Explanations. Journal of Finance, 56(2), 699–720.

Link to Paper: http://www.trendrating.com/wp-content...

About Sawyer Investment Management Company:
SIMCO is a Texas-registered Investment Adviser with its principal place of business in Dallas, Texas. It was formed on January 1, 2015 and is wholly owned by Ryan Sawyer, who is a CFA Charterholder and a Certified Public Accountant. SIMCO specializes in the construction of equity portfolios, and is therefore an ideal resource for long-term investors. The firm goes through a rigorous process for selecting each and every holding in the portfolio. Rooted in the empirical research of academia, the portfolios are generally characterized as large-cap value momentum. For more information about how the portfolios are managed, see our website.

www.sawyerinvestment.com 
https://www.facebook.com/Sawyer-Inves...
https://twitter.com/SawyerInvest

Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency (Part 2)

An academic paper summarized by Sawyer Investment Management Company regarding the abnormal returns attributable to owning momentum stocks.

Abstract: This paper documents that strategies which buy stocks that have performed well in the past and sell stocks that have performed poorly in the past generate significant positive returns over 3- to 12-month holding periods. We find that the profitability of these strategies are not due to their systematic risk or to delayed stock price reactions to common factors. However, part of the abnormal returns generated in the first year after portfolio formation dissipates in the following two years. A similar pattern of returns around the earnings announcements of past winners and losers is also documented.

Citation: Jegadeesh, N., & Titman, S. (1993). Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency. Journal of Finance, 48(1), 65–91.

Link to Paper: http://www.business.unr.edu/faculty/liuc/files/BADM742/Jegadeesh_Titman_1993.pdf

About Sawyer Investment Management Company: SIMCO is a Texas-registered Investment Adviser with its principal place of business in Dallas, Texas. It was formed on January 1, 2015 and is wholly owned by Ryan Sawyer, who is a CFA Charterholder and a Certified Public Accountant.

SIMCO specializes in the construction of equity portfolios, and is therefore an ideal resource for long-term investors. The firm goes through a rigorous process for selecting each and every holding in the portfolio. Rooted in the empirical research of academia, the portfolios are generally characterized as large-cap value momentum. For more information about how the portfolios are managed, see our website.

www.sawyerinvestement.com 
https://www.facebook.com/Sawyer-Investment-Management-Company-1588110057913467/
https://twitter.com/SawyerInvest
https://sawyerinvestment.blogspot.com/

Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency (Part 1)

Buying past winners and selling past losers tends to earn abnormal profits over holding periods less than a year.

 

Jegadeesh, N., & Titman, S. (1993). Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency. Journal of Finance, 48(1), 65–91.

Enhancement of equity portfolio performance using data envelopment analysis

The authors employ Data Envelopment Analysis to form three quantiles of portfolios composed of value and momentum stocks.  They find that stocks in the top quartile (i.e., those composed of the highest value and momentum rankings) significantly outperform the market and the portfolios in the bottom quantile.

Citation:
Pätäri, E., Leivo, T., & Honkapuro, S. (2012). Enhancement of equity portfolio performance using data envelopment analysis. European Journal of Operational Research, 220(3), 786–797.

On Persistence in Mutual Fund Performance

The author starts by summarizing the prior research of momentum, especially the 1-year momentum strategy of Jegadeesh and Titman; however, the author notes that his study finds those excess momentum returns are consumed by mutual fund fees and loads, and may even be just a consequence of portfolios having larger weights in momentum stocks as they rise.

The author used a database of 1,862 diversified equity mutual funds (excluding sector, international, and balanced funds) over the period 1962 - 1993; importantly, the database includes defunct funds so as to mitigate survivor bias. 

The author introduces his 4-factor model, which includes the volatility, size, and value characteristics of Fama/French's 3-factor model, and adds 1 factor for the momentum anomaly.  He then runs a regression on these factors, showing that the addition of momentum as a factor significantly improves the fit of the equations.  In additional tests, he shows that pricing errors based on the equation are significantly reduced when using the 4-factor model instead of the 3-factor model or the CAPM model.

The author then forms portfolios of mutual funds and ranks their performance into deciles and calculates the betas.  In all deciles, the 4 factors explain more than 89% of the variation in returns; size and momentum seem to be the deciding factor; and the factor proxy and value factors seem to have the same effect across all deciles (the factor proxy explaining the majority of the variation in returns, and the value factor explaining none).

The author then dives deeper into the mutual fund performance, noting that in most cases one year's losers become the next year's winners and vise versa.  Also, new funds may have returns significantly different than the mean, but they eventually fall in line with the averages, in a normal distribution. 

The author then ranked mutual funds by momentum, and found that momentum funds actually underperform contrarian funds and typically have higher turnover and fees which adds to the underperformance.  He contributes high performance of momentum portfolios to holding the prior year's winning stocks by chance.

The author then uses his 4-factor regression to rank estimated returns into deciles; as would be expected, top decile portfolios earned the highest excess returns and decreased with each decile.  The most significant contributions to return were the size and market proxy factor; value and momentum were negligible.  Also, the top decile portfolio returns seem to persist over the next 5 years.

The author ends with 3 suggestions for mutual fund investors: 1.  avoid funds with persistently poor performance, 2. past year winners typically have higher than average returns the next year, but not thereafter, and 3. expenses such as management fees, load fees, and turnover all have a significant negative effect on performance.


Carhart, M.M. (1997). On Persistence in Mutual Fund Performance. The Journal of Finance, 52(1), 57–82.

Portfolio - November 10, 2018

Company Name	Ticker	Weight
Intel Corporation	INTC	12.38%
Total SA	TOT	12.04%
Dominion Energy	D	8.60%
Microsoft Corporation	MSFT	6.57%
Mondelez International Inc	MDLZ	6.13%
Exxon Mobil Corp	XOM	5.97%
FedEx Corp	FDX	5.59%
Chevron Corporation	CVX	4.87%
Cognizant Technology Solutions Corp	CTSH	3.63%
Walt Disney Co	DIS	3.59%
Comcast Corporation	CMCSA	3.37%
Laboratory Corp	LH	2.87%
Sempra Energy	SRE	2.86%
Discover Financial Services	DFS	2.79%
Procter and Gamble Co	PG	2.63%
Phillips 66	PSX	2.46%
Pfizer Inc	PFE	2.05%
PepsiCo Inc	PEP	2.04%
Lockheed Martin Corp	LMT	1.79%
Motorola Solutions Inc	MSI	1.73%
Parker Hannifin Corp	PH	1.62%
JP Morgan Chase and Co	JPM	1.59%
Check Point Software Technologies Inc	CHKP	1.05%
American Express Company	AXP	0.91%
Amgen Inc	AMGN	0.88%
		100.00%

Money and Stock Prices in West Germany and the United Kingdom: Is the Stock Market Efficient

The authors study the quarterly period 1960 - 1982 in Germany and the UK, finding the betas for lagged money supply to be significantly nonzero in both markets when regressing stock prices; this concludes that the stock market is not efficient with respect to money supply changes in Germany and the UK over that period.  The authors then split the money supply into anticipated and unanticipated portions as other studies have done, and they find the same results for both variables: stock prices do not fully reflect anticipated or unanticipated money supply.  As such, it appears that past information related to the money supply was not processed efficiently in stock prices.

Darrat, A. F. (1987). Money and Stock Prices in West Germany and the United Kingdom: Is the Stock Market Efficient? Quarterly Journal of Business & Economics, 26(1), 20.

The Monetary Approach to Stock Returns and Inflation

Earlier studies assumed that nominal stock returns and inflation were linked through the Fisher equation (i.e., nominal stock returns = real expected market returns + inflation expectations).  It was later found, however, that nominal stock returns might actually have an inverse relationship to inflation expectations.

The authors use a series of econometric equations relating money returns, stock returns, and gold returns in order to determine how each of the assets affects the other under different conditions.  Under a "money-neutral" condition (i.e., where the stock prices are not affected by the money supply), nominal stock returns will reflect expected changes in inflation.  In "non-neutrality" (i.e., when the real demand for stocks is more sensitive to the real return on stocks than inflation), an increase in expected inflation will increase the return of stocks.  Under a gold standard the relationship between inflation and stock returns may be positive or negative depending on the source of the innovations.

Canto, V. A., Findlay, M. C., & Reinganum, M. R. (1983). The Monetary Approach to Stock Returns and Inflation. Southern Economic Journal, 50(2), 396.

Portfolio - November 3, 2018

Company Name	Ticker	Weight
Intel Corporation	INTC	11.78%
Total SA	TOT	10.67%
Mondelez International Inc	MDLZ	7.41%
Microsoft Corporation	MSFT	6.97%
Chevron Corporation	CVX	5.75%
FedEx Corp	FDX	5.37%
Exxon Mobil Corp	XOM	4.57%
PepsiCo Inc	PEP	4.53%
Walt Disney Co	DIS	3.99%
Procter and Gamble Co	PG	3.73%
Comcast Corporation	CMCSA	3.58%
Cognizant Technology Solutions Corp	CTSH	3.52%
Pfizer Inc	PFE	3.33%
Discover Financial Services	DFS	3.14%
Lockheed Martin Corp	LMT	3.08%
Avalonbay Communities Inc	AVB	2.83%
Parker Hannifin Corp	PH	2.56%
Phillips 66	PSX	2.35%
Sempra Energy	SRE	2.11%
JP Morgan Chase and Co	JPM	2.07%
Amgen Inc	AMGN	1.81%
Motorola Solutions Inc	MSI	1.72%
Simon Property Group Inc	SPG	1.13%
Air Products and Chemicals Inc	APD	0.83%
Verizon Communications Inc	VZ	0.75%
Baxter International Inc	BAX	0.41%
		100.00%