Selecting Equity Mutual Funds with Return Momentum

Summary

The strategy ranks no-load equity mutual funds by their returns over the prior six months, selects the top decile, weights those funds equally, and holds the portfolio for three months. The document also discusses two alternative signals: a fund’s proximity to its one-year net asset value high and its exposure to the stock momentum factor. It reports that research found each signal to contain independent predictive information, while presenting simple return momentum as the strategy examined here.

The cited research links fund momentum to performance chasing and to momentum across investment styles, while noting that investors may be following recent winners rather than identifying skilled managers. The page describes a long-only approach, so it does not hedge equity market exposure. It gives no performance statistics for the six-month return strategy itself, and says the possible benefit of combining all three signals was not tested in the source paper. Findings from other cited studies cover different signals, periods, and investor behaviors, so they do not establish that this implementation will persist.

Key ideas

• Rank no-load equity mutual funds by their returns over the previous six months.
• Buy the equally weighted top decile and hold the selected funds for three months.
• Fund proximity to a one-year net asset value high and momentum-factor exposure are alternative predictive signals.
• The strategy is long-only and does not hedge broad equity market risk.
• The document does not report results for a strategy combining all three signals.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.