NIMF’s new Active Momentum Fund takes the widely used price momentum factor, adds an earnings momentum factor to bring in quality guardrails and then tops it off with a contra overlay at market extremes designed to either protect downside or accelerate upside, thus delivering a promising algo aimed at generating strong alpha with lower volatility.
In normal market conditions, stocks will be weighted equally on price momentum (6m and 12m) and earnings momentum (upgrades/downgrades over last 90 days) and the top 30 stocks that score the highest weighted average scores will be picked for the portfolio and then assigned equal weights during portfolio construction.
When markets go to extremes (measured by market breadth and m-cap weight of sensex over total market cap), a contra overlay will be introduced with a weight that can go as high as 40%.
Contra overlays will be a low volatility score when markets are looking overstretched and on the other hand will be a beta score when markets are looking over-corrected.
This contra factor will align the portfolio either to protect against severe drawdowns when markets look overstretched and ripe for a correction or will enable the portfolio to be primed to make the most of a rally that might set up after a steep correction.
While back-testing data of this model shows encouraging alpha generation with lower volatility, Ashutosh emphasizes that many elements of this model are being actively used for a few years in the AMC’s Quant Fund and its Asset Allocator FoF, with strong performance in actual market conditions.