Momentum and Value are two powerful and persistent sources of market outperformance in the long run.

• Momentum – Stocks with high past 12-month returns tend to outperform stocks with low past 12-month returns and the market.
• Value – Stocks with low valuation multiples tend to outperform stocks with high valuation multiples and the market.

These sources have been well-documented in academic research over several decades.

• Momentum – Jegadeesh and Titman (1993); Asness et al. (1996)
• Value – Basu (1977, 1983); Stattman (1980); Rosenberg et al. (1985)

A long-term perspective on the performance of Momentum and Value stocks is provided by the research work of Eugene Fama and Ken French. The graph below shows the performance of the Fama-French long-only large cap momentum and value portfolios since January 1, 1940 for the U.S. stock market. Over the 1940-2009 time period, the Fama-French momentum and value portfolios outperformed the market by 3.80% per annum and 3.63% per annum, respectively.

However, many investors are unable to capture this significant market outperformance of Momentum and Value in real-life portfolios.

Fama/French Long-only Momentum and Value Portfolios
Hypothetical Growth of $1
January 1, 1940 - December 31, 2009

Momentum is a market capitalization-weighted long-only portfolio containing stocks which are 1) above the NYSE median market cap and 2) in the top 30% of stocks based on the most recent 11-month return lagged by 1 month. Value is a market capitalization-weighted long-only portfolio containing stocks which are 1) above the NYSE median market cap and 2) in the top 30% of stocks based on book/market ratio. Market is the market capitalization-weighted return on all NYSE, AMEX and NASDAQ stocks.

Source: Westpeak. Momentum and Value returns derived from the website of Kenneth R. French.
Past performance is no guarantee of future results.

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