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The underperformance of momentum-driven
investment strategies in the recent past
has caused some investors to wonder: Is
momentum dead as a risk factor? Kai Trinkies,
Team Lead Conusltant Relations, likes to
discuss this issue with Thomas Zimmerer,
Global Co-Head of Multi Asset at Allianz
Interview with Thomas Zimmerer, Global
Co-Head of Multi Asset at Allianz Global
Mr Zimmerer, what challenges are momentum-driven strategies facing at the moment?
As a risk factor associated
with a proven, positive risk premium, momentum
remains very much alive. However, that does not
mean all momentum investing strategies are in
robust health. To the contrary, some of the more
simplistic approaches to momentum investing
might never recover – and appropriately so.
Capturing the risk premium associated with
momentum is no easy task, and it cannot be
accomplished reliably with some of the basic trend-
following strategies in use today. Many
contemporary momentum strategies share some
critical flaws: they rely on a single trend, usually
from a constant “lookback period;” they are unidimensional,
meaning that they take into account
only direction, ignoring other potentially relevant
factors; they operate in a single asset class; or the
investment horizon they employ is too short.
Mr Zimmerer, do you believe that momentum-driven strategies can still work despite the flaws you have described? What would a more promising strategy look like?
Thomas Zimmerer: We believe that investors can
improve their chances of success by adopting a
more sophisticated approach to momentum. This
Momentum 2.0 strategy includes the following
four elements: following multiple trends with
multiple lookback periods; employing a multidimensional
approach; constructing a riskbalanced
multi asset portfolio, and adhering to
an appropriate, long-term investment horizon.
Why does it makes sense from your point of view to analyse multiple lookback periods in order to derive the right investment decisions?
Research demonstrates that
the optimal lookback period for a momentum
strategy – the period with the most predictive
power – is eight to nine months. However,
research also shows that: 1) The predictive
power of lookback periods fluctuates, and 2)
Momentum returns for various lookback periods
are less than fully correlated over time. To put
it another way, there is not just one trend, but
rather a number of overlapping trends whose
relative attractiveness to one another changes
over time. Given these findings, the most
effective approach would be to use a mixture of
lookback periods to determine trend signals,
rather than any single “best” lookback period.
A mixture of lookback periods (e.g., 1, 3, 6, 9,
12 months) can yield a more stable alpha result
over time than any one of these lookback
How is a multi-dimensional approach characterised?
TThe most popular trend
concepts are one-dimensional, meaning they
incorporate only a single metric direction. By
contrast, trends in the actual market cycle
are two-dimensional, meaning that they are
characterised by the two metrics of direction
and strength. Adding the concept of trend
strength to a momentum strategy can give
investors an important advantage because
strength has an impact on trend duration.
You also mentioned the possibility of combining different asset classes in a multi asset approach.
Thomas Zimmerer: Momentum returns across
asset classes normally are so asynchronous
over time that their returns show virtually no
correlation to one another. Using a multi asset
approach therefore can deliver diversification
returns with suitable portfolio construction. An
optimal portfolio construction is one in which the risk budget is distributed similarly among the
uncorrelated signal sources. Using that
framework, with four uncorrelated signal sources
and efficient portfolio construction, the excess
return potential per unit of risk (risk-return ratio)
could be increased significantly.
What role does the investment horizon play in your strategy?
Thomas Zimmerer: Although trend-following
strategies rely on short-term, tactical portfolio
adjustments to generate alpha, the goal of these
strategies is to capture the long-term risk premium
associated with momentum. In this context, it is
important to understand the term “risk premium”
correctly. The strategy will not necessarily reap the
expected premium in each year; in fact, the
investment return is volatile and can (and will) be negative in individual years. While the long-term
target return is similar to that achieved by
traditional equity and bond investments, the return
pattern may be quite different. For this reason,
long-term investors with an investment horizon of
10 years or more may make smaller investments
in momentum strategies to create long-term
diversification effects, provided that they can live
with the short term “premium-related risk”.
Are you confident that your Momentum 2.0 Strategy will work in real life?
Thomas Zimmerer: In light of our research,
momentum is not dead. To the contrary, it is as
strong and healthy as ever. The success factors for
momentum investing are multi- faceted, and go
beyond the trivial task of selecting one lookback
window to determine the trend of an asset class.
Investors asking if momentum is dead are likely
using momentum investment strategies that lack the important elements that are needed to
consistently capture the momentum risk premium.
Investors who adopt this more complex,
comprehensive and effective model, which we
call Momentum 2.0, will find that the momentum
factor is very much alive, and that momentum
investing can still be exploited to the benefit of
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