Six strategies for superior returns: Momentum, value and other ways to beat Sensex
Share portfolios based on six investment strategies such as value, momentum, quality, low volatility, dividend, and small cap have outperformed the benchmark Sensex and broad based indices between 2005 and 2017.
For instance, the index based on momentum stocks has given an annualised return of 20.2 per cent during October 2005 and June 2017 while index of low volatility, quality and dividend stocks gave an annual return of 19 per cent each. During this period, Sensex gave a return of 15 per cent. Among these indices, low volatility, quality, and momentum delivered better risk-adjusted returns than the benchmark indices.
Low Volatility Index has a highest return risk ratio of 1 followed by Quality Index at 0.99 and Momentum index at 0.80. The Sensex’s return risk ratio was 0.60. When the ratio reading is higher, it means there is a better chance of lower-risk returns. Smart beta strategies refer to the use of an alternative methodology rather than following a marketcap based index allocations. A smart beta investment strategy is designed to add value by strategically choosing, weighting and rebalancing the companies built into an index based upon objective factors.
“Historically, factor-based strategies have generated significant risk-adjusted returns in the long run, but they can also exhibit a high amount of cyclicality in the short run” said Akash Jain, associate director, global research, S&P Dow Jones. “Multi-factor or combination of factors can help diversify factor exposure & may help deliver smoother excess return across market cycles, with the effectiveness depending on the correlation of returns among factors”.
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Via:: Economic Times – Stocks