A value strategy means investing in undervalued companies with strong fundamentals that are trading below their intrinsic value and are out of favor from a price perspective. It is expected that these companies will eventually show a strong upward price movement.
On the other hand, the momentum strategy focuses mainly on the upward price trajectory of the companies and invests in companies that are currently in high demand and whose prices are expected to rise quickly.
Over the years, both strategies have effectively complemented each other, especially when applied through the right, truthful products. They have performed well in both bull and bear markets, allowing investors to maintain consistency and limit underperformance at the overall portfolio level.
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Which strategy is the winner?
To find out, we considered two broad smart beta indices: the Nifty 500 Value 50 Index and the Nifty 500 Momentum 50 Index. We considered daily rolling compound annual growth rate (CAGR) returns over 3, 5, and 10 years since its inception on November 14, 2024. The data clearly shows that the momentum strategy has outperformed the value strategy in 65%, 78% and 97% of cases. and show better outperformance and consistency, especially on a ten-year rolling returns basis.
The value strategy, on the other hand, has been cyclical, delivering outperformance in cycles based on three- and five-year rolling returns.
Let’s take a look at the average CAGR generated by the two strategies on a daily rolling basis of 3, 5, and 10 years. While momentum generated 20%, 19.6% and 20.5%, value investing returned 15.7%, 13.5% and 13.2%.
The data shows that the momentum strategy has shown higher average returns, better maximum returns, lower downside, and reduced cyclicality compared to the value strategy. Therefore, the momentum strategy seems to be the clear winner when it comes to managing both risk and return.
This begs the question: is the value strategy a loser? In the context of smart beta passive investing, yes. However, we should not forget that both strategies have active funds managed by fund managers.
The right way to respond to the value theme is to invest in active value funds that are true to their label. Value investing requires a value picker, someone with deep human intervention and deep intelligence and foresight to identify the right value companies based on fundamental, technical and sentimental analytical skills. While the active value strategy has demonstrated long periods of cyclicality and performance in cycles, it is critical not to ignore the select high-quality active value funds that have demonstrated strong outperformance.
On the other hand, because the momentum strategy requires accurately capturing price momentum, the algorithm-based smart beta passive momentum strategy has worked well with a robust track record. The best way to capitalize on this theme is to invest in a broad passive momentum smart beta strategy such as the Nifty 500 Momentum 50, which has managed to not only demonstrate higher consistency but also outperformance show, and all at a low cost.
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In conclusion, according to historical data, both strategies perform in cycles, with the momentum strategy working well, especially during bull market cycles, while the value strategy excels during recoveries and bull markets.
It has been found that the momentum strategy is more consistent and the value strategy is more cyclical. Ideally, investing in a 50:50 ratio in both strategies makes sense if an investor has a long-term horizon. However, looking at the cyclicality of the value strategy, a higher allocation to the momentum strategy may be considered to maintain consistency and outperformance.
(Rushabh Desai, Founder – Rupee With Rushabh Investment Services. Opinions are personal.)
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