Growth Beats Value…but with a lot of help!
When Growth Beats Value: Removing Tail Risk From Global Equity Momentum Strategies
- Clare, Seaton, Smith, and Thomas
- A version of the paper can be found here.
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We investigate the relationship between value, growth and momentum investment styles across a wide range of developed and emerging economy equity markets. As would be anticipated, value investing generally beats growth. We then determine whether the application of relative momentum or trend following filters can enhance the risk-adjusted performance for either value or growth investors. We find that both value and growth portfolios benefit from momentum filters but particularly the latter, though the application of such a filter still leaves investors with return volatility that is typical of equity markets along with negative skewness and with high maximum drawdowns. However, our results show that the use of a simple trend following filter typically delivers a much more favourable investment performance than relative momentum with considerably lower volatility and smaller drawdowns. Furthermore, the application of a simple trend following filter either on its own or in combination with a relative momentum filter, not only reduces the performance advantage of value over growth investing but actually reverses this advantage.
The authors first remind us that value beats growth:
They also remind us that momentum works:
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Definitions of common statistics used in our analysis are available here (towards the bottom)