Thread by @ReformedTrader

1/ Combining Value and Momentum (Fisher, Shah, Titman)

"Simultaneously incorporating both value and momentum reduces transaction costs and better utilizes the information from unfavorably-ranked value and momentum stocks in a long-only portfolio."

papers.ssrn.com/sol3/papers.cf…

2/ Ranks are based on percentile of aggregate market cap that a stock is above for each factor.

Turnover = total amount bought or sold each month / portfolio size

Bid/ask spreads have fallen dramatically in the past few decades, so two estimates of transaction costs are used.

3/ "Even though the percentage of aggregate market cap is similar for the small value and momentum portfolios, the small value portfolio tends to hold close to twice as many securities as the small momentum portfolio due to holding stocks with small market capitalizations."

4/ "From a practical perspective, the last two rows of Table 2 can be viewed as investing in one manager to obtain value exposure and another manager to obtain momentum exposure."

5/ "Avg. V/M score reflects the percentage of aggregate market cap that has the same or lower average momentum and value rank.

"This approach increases average returns by avoiding value stocks that have negative momentum and positive momentum stocks that are growth-oriented.

6/ "As a result, both the value and momentum factor exposures are higher than the linear combination of single factor value and momentum portfolios. Also, portfolio volatility drops, as value and momentum premiums are negatively correlated."

7/ "Both approaches that incorporate negative characteristic information by avoiding growth and negative momentum stocks improve risk-adjusted performance over single-factor portfolios that fail to incorporate this information due to the long-only constraint."

8/ "Avg. V/M has a larger adverse impact if trading costs are high. The second approach, which has greater exposure to the slow factor (HML) and less to the fast factor (MOM), is better if the return premium associated with the slow signal is large relative to the fast signal.

9/ "If the signals have high correlations to one another, the second approach is preferred, as the fast signal does not add much to performance but increases turnover. If the signals have negative or low correlations, the first approach is preferred for more diversification."

10/ "Despite the poor performance of momentum (2000-13), both techniques that jointly take into account both momentum and value characteristics have higher Sharpe ratios than the market, the pure-play value portfolio or the 70/30 linear combination of value and momentum.

11/ "So even when momentum does relatively poorly, there can be a benefit from combining momentum with value in an integrated portfolio (due to accounting for negative characteristic information instead of ignoring this information using single-factor long-only portfolios)."

12/ "Our evidence suggests that this advantage is also especially important for small capitalization stocks, where because of the higher costs of short-selling, it is more difficult for investors to express negative sentiment."

13/ Related reading:

Another Look at Trading Costs and Short-Term Reversal Profits

https://twitter.com/ReformedTrader/status/1324422080985591809

Long-Only Style Investing: Don't Just Mix, Integrate

https://twitter.com/ReformedTrader/status/1127035098849660928

Comparing Cost-Mitigation Techniques

https://twitter.com/ReformedTrader/status/1341581135944376321