A look at a Canadian momentum strategy

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With no actively managed pure Canadian momentum strategies available in Canada according to research by Hillsdale Investment Management Inc., it decided to fill the market gap in May 2018.

“It’s a tough factor to define and find,” says Chris Guthrie, the firm’s president and chief executive officer, chief investment officer, portfolio manager and founding partner. “It’s one of the ones people have the most trouble with because it only exists through time.”

There’s always a spot, even in an optimization portfolio, for a company that’s moving fast, he adds.

The Canadian momentum strategy, which was launched after Hillsdale was approached by a client, contains names almost directly opposite to what most pension funds own, at least in public equities, Guthrie says. “In Canada, you own large cap, predictable yield names — for the most part. The TSX 60 is a clump of banks and pipelines and such things, so they’re almost anti-momentum.”

Certain stocks, like Shopify Inc., would be hard to find in a Canadian portfolio, he adds. “In other words, growth is difficult to find in Canada.”

Typically, momentum is a small- to mid-cap phenomenon that would complement core or your passive holdings in large-cap Canadian stock,” says Guthrie, noting using a momentum strategy doesn’t come without risks.

It is sensitive to volatility, so can be difficult to implement and more fitting in multi-strategy portfolios. “[My] biggest trouble with momentum is just the shape of the market movement,” says Guthrie, noting there’s a fractal component to markets, so when markets move up and down it affects momentum significantly.

Even with this challenge in mind, there are still reasons for a pension fund to include a momentum strategy, says Harry Marmer, executive vice-president and partner at Hillsdale. One reason, he notes, would be to diversify manager by style. “As we know, there are different investment manager styles and momentum is very unique. It’s actually an excellent complement to a value approach, or to a large-cap core approach. And the reason why they would want to diversify by style is that they would end up with a smoother investment journey. In other words, lower tracking error risk and, hopefully, the same alpha or value-added in the long term.”

Due to the challenges of running a pure price momentum strategy, Hillsdale incorporated some other attributes into the strategy that are still closely tied with momentum, like sales momentum, for example, says Alexander Etsell, portfolio manager and partner at the firm. “And so by pulling some of those things in and looking at a very wide range of frequencies, we’ve build a momentum strategy that can stand on its own, and that’s sort of how we approached it.”

And, the strategy’s performance so far is as expected.

Since its inception, the Canadian momentum strategy’s annualized return is 1.8 per cent, compared to the S&P/TSX composite TRI of 6.1 per cent over. The year-to-date performance, as of May 31, 2019, for the Canadian momentum strategy has been 13 per cent compared to 13.4 per cent for the S&P TSX composite TRI.

“It’s been interesting,” says Etsell. “Obviously, we went through some volatility in the markets towards the end of last year — a tough period — and then a very strong period to start this year. That could be an extremely challenging environment for a momentum [strategy], so I think the [strategy] is performing well, sort of in line with our expectations, essentially matching the markets this year.”

For investors that decide to use a momentum strategy, Guthrie highlights it should be complementary to a core strategy. “Make sure you have the core taken care of first.”

Updated: July 3, 2019 at 9:06 AM

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