When Growth Beats Value: Applying Momentum Filters to Growth and Value Portfolios

Abstract

We investigate the relationship among Value, Growth, and two forms of Momentum across a wide range of developed and emerging international equity markets using MSCI total return “smart beta” indexes. As anticipated, Value generally beats Growth. A distinction is then made between relative momentum, where assets are ranked according to their performance against each other, and absolute momentum (sometimes known as trend following), where assets are categorized according to whether they have recently exhibited positive nominal return characteristics. We find that both Value and Growth portfolios benefit from momentum filters but particularly the latter. When we overlay simple absolute momentum on these factor indexes, it typically delivers a much more favorable investment performance than relative momentum, with considerably lower volatility and smaller drawdowns. Overall, with the help of momentum-based investment rules, we find that Growth can outperform both comparable buy-and-hold and Value investment styles, a result that is almost certainly robust to transactions cost considerations.

TOPICS: Mutual fund performance, passive strategies, mutual funds/passive investing/indexing