I have written about momentum investing before. I compared the performance of S&P BSE Momentum Index TRI with Nifty 50, Nifty Next 50 and Nifty Midcap 150 indices in an earlier post (Does momentum investing work in India?). The findings were in favour of S&P BSE Momentum Index, which outperformed all 3 indices by a wide margin at only slightly higher volatility.
However, from the investors’ point of view, this analysis was not quite useful since there are no index funds following this S&P Momentum index. If you wanted to invest in a momentum portfolio, you could select momentum stocks on your own (some work there or subscribe to a Smallcase offering this strategy for a fee.
This is about to change. UTI has recently filed a fund prospectus with SEBI for UTI Momentum Index Fund. The fund will try to replicate the performance of Nifty 200 Momentum 30 index. And not S&P BSE Momentum Index. Hence, I thought it important to review the performance of Nifty 200 Momentum 30 Index, compared to other popular equity indices. While the scheme is yet to get approval from SEBI, let’s see how this index has performed.
Nifty 200 Momentum 30 Index Fund
Momentum investing is about buying stocks that have done very well (stock price returns) in the recent past.
Conventional investing is about: Buy Low and Sell Higher.
Momentum Investing is about: Buy High and Sell Higher.
I reproduce the excerpt from the index factsheet.
‘Nifty200 Momentum 30’ Index which aims to track the performance of the top 30 companies within the Nifty 200 selected based on their Normalised Momentum Score.
The Normalised Momentum Score for each company is determined based on its 6-month and 12- month price return, adjusted for its daily price return volatility.
The weight of each stock is based on the factor tilt methodology – the weight is derived by multiplying the free float market cap with the Normalised Momentum Score of that stock.
Stock weights are capped at the lower of 5% or 5 times the weight of the stock in the index based only on free float market capitalization
Nifty 200 is the parent index.
Nifty 200 Momentum 30 index selects the top 30 companies based on their momentum score.
You can find out more about how the stocks in the index are selected in the methodology document. One major difference between the stock selection methodology is that Nifty Momentum Index considers both 6-month and 12-month price performance of stocks while S&P BSE Momentum index considers only 12-month price performance.
The Nifty 200 Momentum Index was launched on August 25, 2020. Hence, almost the entire data is backtested. There is not much live data. We had live data for almost 5 years in case of S&P BSE Momentum index.
Keep this mind while looking at index performance in this post. The index has been launched only because it has done well in the backtest. You wouldn’t expect NSE to launch an index that has not done well even in the past. The only exception perhaps is Nifty High Beta 50 Index.
The Performance Comparison: Nifty 200 Momentum 30 Index
We compare the performance since April 1, 2005.
- Nifty 50 TRI (Total Returns index)
- Nifty Next 50 TRI
- Nifty 200 TRI (Parent index for Nifty 200 Momentum 30 index)
- Nifty 200 Momentum 30 TRI
Nifty 200 Momentum 30 index is a clear winner.
Nifty 200 Momentum 30 Index: Rs 100 invested on April 1, 2005 grows to Rs 1,484. CAGR of 19.06% p.a.
Nifty 50 Index: Rs 100 grows to Rs 676. CAGR of 13.16% p.a.
Nifty Next 50: Rs 766. CAGR of 14.07% p.a.
Nifty 200: Rs 644. CAGR of 12.81%
Let’s look at the calendar year returns.
Very impressive again.
Among the 4 indices, Nifty Momentum Index has topped in 11 out of 16 years (including incomplete years in 2005 and 2020).
Nifty Momentum index beats Nifty 50 in 13 out of 16 years. Only in 3 years (2008, 2009 and 2018) has the Nifty 200 Momentum 30 index failed to Nifty 50 index.
Nifty Momentum index beats Nifty Next 50 in 14 out of 16 years. Fails to beat only in 2009 and 2012.
The Momentum index beats its parent index (Nifty 200) in 13 out of 16 years. Fails to beat in only in 2008, 2009 and 2018.
The Rolling Returns
This is not unexpected given what we found in calendar year performance.
You can see that the Nifty Momentum index has been the clear winner in this decade. Has given better returns almost all the time.
What about Volatility?
You would expect that the momentum index will be more volatile as compared to other indices. However, note that, the index methodology (in both NSE Momentum and S&P BSE Momentum Index) penalises stocks for higher volatility.
Let’s look at the net impact.
There is not much difference.
Again, the momentum index seems to have done very well. In fact, during the past 5 years, it seems to have to lowest drawdowns.
Nifty 200 Momentum 30 has delivered an impressive performance. The returns are far superior. There does not seem much compromise on the risk (volatility front). The momentum indexing methodology seems to work well at least in the back-test.
- Past performance may not repeat.
- Almost the entire data for the Nifty 200 Momentum 30 index is backtested. Not enough live data. Hence, consider the findings with a bucketful of salt.
- Even the parent index (Nifty 200) was launched only in July 2011. We have compared the performance since April 1, 2005.
- You will be able to invest in the ETF or an index fund benchmarked to Nifty 200 Momentum 30 index fund. Expense ratio, transaction and impact costs will impact your returns. It is possible that the tracking error will be higher than the passive funds tracking bellwether indices such as Nifty and Sensex.
- The Nifty Momentum Index rebalances in 6 months. For a momentum portfolio, 6 months may seem like ages. I have seen practitioners rebalancing momentum portfolios on a weekly or a monthly basis. S&P BSE Momentum index also rebalances every 6 months.
- To be fair to the NSE and S&P indices, monthly rebalanced indices may not find many buyers (due to transaction and impact cost).
What should you do?
Assuming UTI Momentum Index Fund gets SEBI nod, should you invest in the fund?
Before you invest, keep the following points in mind.
- Nothing works all the time. This index can underperform badly at times. You must have belief.
- All the findings shown above are based on back-tested data. Live results can be different.
- Do not ignore costs i.e. expense ratio etc.
Think it will be a good idea to review performance on live data for some time and then make this choice.
If you are sold to momentum investing and want to take exposure to momentum stocks through mutual funds, you can consider some exposure to this theme as part of your satellite equity portfolio.
Test Results of other Investment Strategies
Over the past few months, we have tested various investment strategies or ideas and compared the performance against the Buy-and-Hold Nifty 50 portfolio. In some of the previous posts, we have:
- Assessed whether adding an International Equity Fund and Gold to an Equity portfolio has improved returns and reduced volatility.
- Does Momentum Investing work in India?
- Does Low Volatility investing beat Nifty and Sensex?
- Considered the data for the past 20 years to see if the Price-Earnings (PE) multiple tells us anything about the prospective returns. It does, or at least has in the past.
- Tested a momentum strategy to shift between Nifty 50 and a liquid fund and compared the performance against a simple 50:50 annual rebalanced portfolio of Nifty index fund and liquid fund.
- Used a Simple Moving Average Based Market Entry and Exit Strategy and compared the performance against Buy-and-Hold Nifty 50 over the last two decades.
- Compared the performance of Nifty Next 50 against Nifty 50 over the last two decades.
- Compared the performance of Nifty 50 Equal Weight vs Nifty 50 vs Nifty 50 over the last 20 years.
- Nothing works all the time. Used Nifty 50, Nifty MidCap 150 and Nifty Small Cap 250 index to demonstrate that sometimes intuitive investment choices do not work.
- Compared the performance of 2 popular balanced funds against a simple combination of an index fund and a liquid fund.
- Compared the performance of a popular dynamic asset allocation fund (Balanced advantage fund) against an equity index fund and see if it has been able to provide reasonable returns at low volatility.