Momentum is widely acknowledged as a robust and persistent driver of excess returns in global equity markets.

We conducted an analysis of momentum relative to other popular factors across various geographies and size categories within global equity markets.

• Momentum demonstrated exceptional performance, surpassing each respective market return in 100% of equity markets we tested.
• Momentum consistently yielded the highest excess returns, outperforming other popular factors (Value, Growth and Quality) in 91% of the samples.
• Momentum exhibited superior Sharpe ratios in 75% of markets we tested, emphasizing its ability to generate favorable risk-adjusted returns.

For more detail on momentum’s performance and risk within each distinct market, see Momentum Works Everywhere, as part of our Momentum Library.

This performance information is considered hypothetical, back-tested performance and is limited to a sophisticated investor audience. Fama-French historical returns are calculated using data from the Fama-French data library. The time period covered is July 1963 through August 2023 for US markets and July 1991 through August 2023 for Non-US and Global markets. The factors displayed are referenced by Ken French as follows: Value (High Book/Market), Low Size (Small Cap.), Momentum (High Prior Return), Growth (Low Book/Market), and Quality (High Operating Profitability). The Global portfolios are formed with using a Developed markets weight of 90%, and an Emerging markets weight of 10%. 

Momentum can enhance portfolio effectiveness – either when paired with other popular style factors or a stand-alone source of alpha.

Momentum offers:

• A stand-along source of alpha as the best performing factor over time. See Momentum: The Ever-Rising Tide for more information.
• Strategic diversification benefits with Value. See Momentum Is Usually Not Value for more information.
• A suitable replacement to traditional Growth. See Momentum Is Not Growth for more information.
• Complementary exposure to quality. See Momentum and Quality for more information

As part of our research, we computed optimized portfolios based on maximizing information ratios to determine the optimal mix of momentum, quality, value and growth within different global equity market segments.

Factor correlations are for Axioma’s US Equity Fundamental Risk Model for February 1985-April 2024. Optimal portfolios are calculated using data from the Fama-French data library with US small cap as the representative strategy for the period July 1963-April 2024. US small cap represents the bottom three size quintiles with market cap weights of (Q1, Q2, Q3) = (17%,29%,53%). The factors displayed are referenced by Ken French as follows: Momentum (High Prior Return), Quality (High Operating Profitability), Value (High Book/Market), Growth (Low Book/Market). We use the top quintile for each factor.

Isn’t momentum overly risk?

Both momentum and value have demonstrated significant style premiums over the long-term, however, investors typically associate momentum as the ‘riskier’ choice between the two.

But we find Momentum is actually no more risky than Value.

Our anlaysis in Risky Business: Value versus Momentum uses nearly 100 years of data and numerous risk measures to show a momentum strategy has lower realized risk than value, while outperforming meaningfully

Isn’t momentum prone to crashes?

Another pushback against momentum is the strategy’s susceptibility to crashes – short, sharp periods of underperformance.

Most academic studies on momentum crashes involve drawdown analysis of a long/short portfolio formed by buying prior winners and shorting prior losers.

In Momentum Crashes: The Long & The Short of It, our analysis shows these regimes of underperformance are typically characterized by a market decline followed by a subsequent market rebound.

We find the largest momentum crashes are almost fully explained by the short side crashing upwards due to its rising exposure to beta in a market rebound, while the long side of the strategy faces far less dramatic drawdowns.

Don’t trading costs erode the momentum premium?

As we find in The Quick and The Dead, frequent rebalancing is necessary to harvest the momentum premium.

The increased trading costs associated with this rebalancing requires a focus on liquidity and cost optimization to preserve alpha.

In Momentum and Trading Costs, we discuss how academic assumptions of trading costs can differ significantly from those realized by a momentum strategy in practice.

We show that with efficient implementation and careful management, the momentum premium can indeed survive trading costs.

Performance & Risk Comparison of Momentum and Value | US Equities, January 1950 – September 2022
Rolling 3-Year Annualized Volatility of Returns | US Equities, January 1950 – September 2022

Fama-French historical returns are calculated using data from the Fama-French data library for US equities. The factors displayed are referenced by Ken French as follows: Value (High Book/Market), Low Size (Small Cap.), Momentum/ WML (High Prior Return), Growth (Low Book/Market), and Quality (High Operating Profitability). Momentum portfolios with varying rebalance frequency are calculated using the top 3,000 US stocks by market capitalization after excluding any stocks with a month-end price less than $2 as of the portfolio formation date and takes the top decile by momentum each month. Turnover for the Russell 3000 Index is based on the annualized trailing five years. Turnover for the momentum portfolios is annualized for the period January 1985 through June 2022.