Academic Studies Find Mutual Funds Profit from Momentum

May 21, 2013

booksMorningstar and NoLoad FundX have strikingly different investment approaches, so we were surprised to read Morningstar’s Does Momentum Investing Work? (April 10, 2013).

The article concludes that momentum investing does work, calling the evidence in support of momentum investing “too overwhelming to ignore.”

Morningstar cited a 1993 study that found momentum in U.S. stocks and noted that “many studies have extended this evidence to foreign stocks, commodities, currencies, and bonds. Momentum even works across individual asset classes and country stock indexes.”

Suggesting that “there are only a handful of pure momentum funds available to most investors”, Morningstar overlooked the equally overwhelming evidence that mutual funds also profit from momentum.

Twenty years ago, a groundbreaking study entitled “Hot Hands in Mutual Funds” was published by the prestigious Journal of Finance. Written by Harvard researchers Hendricks, Patel and Zeckhauser, it concluded that, “The net returns of no-load growth mutual funds…that perform well in the most recent year continue to be superior net performers in the near term (one to eight quarters).” Since then many other studies have corroborated these conclusions.  More recent research finds that momentum also exists in international funds (funds managed overseas).

Academic studies often refer to momentum in mutual funds as “persistence of performance” and NoLoad FundX’s Upgrading approach is designed to help investors capitalize on this phenomenon. We’ve compiled a list of academic studies from 1970 through 2012 that found evidence of persistence of performance in mutual funds. Click here to download the pdf.

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