Pure Momentum is our rules-based momentum strategy that you can use to build your own momentum portfolio with built-in capital protection.

• Learn how momentum works
• Risk-adjusted portfolio weights
• Methods for managing the risk of major stock market crashes
• How to build your own momentum portfolio
• Methods for managing the risk of major stock market crashes
• View rankings and position sizes in the platform

Systematic strategies should be seen as long-term investment strategies that beat indexes over time. We should also be aware that it is not a strategy that is expected to give a stable 10% per year. Nor is it a strategy that shows positive returns every year or has a low correlation to the stock market. After all, we are buying stocks.

The hope is that Pure Momentum will perform well at the beginning of longer uptrends in the stock market and during positive market phases. Furthermore, capital will be protected during longer weak periods in the stock market.

Momentum is a well-documented anomaly

In systematic strategies, we put our opinions, hopes and guesses aside. We don't try to time the market or find the "best" stocks. Instead, we focus on taking advantage of the momentum effect that, together with risk-adjusted weights on portfolio holdings, has outperformed the index over time.

The momentum effect is well documented over the years. It has worked for the past 100 years and we assume that the effect will persist because investor behavior does not change regardless of new technological or other technological changes.

Momentum is not a strategy that suits everyone and that is also one reason why momentum strategies work over time. The same applies to value strategies. There is an edge or advantage, but far from everyone is able to follow the strategy and thus bear fruit. With a systematic strategy, you have a better chance of success.

We believe in the concept and therefore assume that momentum will continue to beat the index over time because investor behavior does not change. It is important that we are disciplined and have patience. There will be long periods where momentum or other types of strategies are weaker.

The road has great importance

Pure Momentum differs from many momentum strategies in several aspects. An important aspect is that the strategy not only looks at how many percent the shares have risen in the last 6 or 12 months, but also studies what the path has been for the stock. Has it been a bumpy ride or a calm and nice uptrend?

We look for stocks that are gradually rising, hence the name Pure Momentum. This is because the path is of great importance.

The study Stocks as Lotteries and the Cross-Section of Expected Returns by Turan G Bali shows that investors are overpaying for lottery-like stocks that have risen sharply.

This is because a stock that has risen rapidly, for example 100%, will attract attention and the share price will more quickly reflect the fundamental value or even trade well above the fundamental value. These stocks then tend to underperform.

A stock that rises gradually, on the other hand, has greater upside before the stock becomes noticeable, trades at its fundamental value, and market participants may start to “hunt” the stock. Remember, the momentum effect is about the stock underperforming on positive information.

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