As of the first half of August, the year 2021 seems to be a phenomenal year for equities. World equities have earned more than +16%, and US equities, even more, topping +20% gains. Is there even any better strategy this year than just holding US equities? Well, yes, there are actually several of them. Are they all tied to US equities? Many of them are, but many of them are not. Some of them are not even tied to equities at all.

Note: This blog is Part 1 of a series. Part 2 is available here, and Part 3 is available here.

Can we explain stock momentum by industry, sector or factor momentum? Moreover, a similar question could be raised about the short-term reversal. The novel research by Li and Turkington (2021) uses a robust regression model to divide momentum and reversal returns into the main drivers. The individual momentum anomaly that broader market groups do not fully explain exists in the whole sample but is statistically weak. On the other hand, the reversal anomaly is highly significant. Secondly, the traditional 12-months momentum can be better explained by the factor momentum than the industry or sector momentum. Still, the industries, industry groups, sectors, and even factors have distinct drivers, and the anomalies seem different.

Summer Olympics are a major event that attracts attention from the moment the host country is announced. However, that’s not shocking. The Olympics require a lot of planning, infrastructure building and investments. Still, countries battle for the opportunity to host these events. Undoubtedly, hosting the Olympics is prestigious, helps tourism, and many even argue that it also helps the domestic economy despite the costs of hosting. Therefore, it is natural to expect that the Tokyo Olympics should impact the domestic stock market.

Undoubtedly, in the recent past, the value is under scrutiny. Many researchers have aimed to answer questions like is the Value factor dead? The recent underperformance of the academic value factor (HML) can be tricky to understand, especially when most well-known and influential investors are labelled as “value” investors. A novel research paper by Choi et al. (2021) adds to the literature with its valuable insights. The main topic of the paper is the thorough examination of the B/M ratio in value style investing. Despite the well-known fact of the economy shift towards intangible assets, value investing still seems to be anchored to the B/M ratio that underestimates the true value. For example, Fama and French’s well-known HML value factor is based on B/M, value indexes are based on B/M (such as Russell value indexes) and subsequently, ETFs and benchmarks too.

Momentum seems to be present everywhere and based on academic studies, it is even hard to find assets where the anomaly does not work. Among the large number of research papers related to momentum, the discovery of factor momentum is still relatively new. It is a truly important finding in the world of systematic strategies – there seems to be a return continuation among factors. The novel research of Fan et al. (2021) builds on the recent academic research and shows that, after all, the factor momentum might be different. To be more precise, the authors show that looking at the universe of 20 factor strategies, the factor momentum seems to work and can span individual equity momentum strategies (standard momentum, industry momentum and intermediate momentum). However, the factor momentum is mostly driven by only six factor strategies, and the return continuation of the remaining factors is weak. Additionally, those sixteen non-return continuation strategies cannot span the momentum effects mentioned above. Therefore, the results show that the factor momentum works on the aggregate but individually works much better. In fact, the factor momentum return of the six return continuation factor is significantly better compared to the rest or buy-and-hold portfolio. Moreover, the authors have also identified that the “best” factor momentum strategy is the Betting against beta and conclude that the reason is the unique weighting scheme utilized by the factor. The beta weighting assigns a higher weight to smaller companies, where the momentum tends to be stronger. Overall, the research paper is an important extension of the factor momentum literature.