Deep Dive: Momentum Investing – Does it work in Indian Equities?

Global Evidence of Momentum Strategy: 

 

• Momentum has been studied extensively across different markets, asset classes, sectors, and industries.  

• The concept was first documented in 1993 by scholars Narasimhan Jegadeesh and Sheridan Titman, who found that buying stocks that performed well over 3-12 months yielded significant positive returns.  

• In majority of the developed markets, momentum has generated a premium which has persisted across various market environments, particularly during long bull cycles.  

 

For instance, the MSCI World Momentum Index has outperformed the MSCI World Index with annualized returns of 11.4% vs. 8.5% since 30th June, 1994 and has also delivered an alpha of >200bps vs. MSCI World over the last 10 years. The MSCI World Momentum Index includes large and mid-cap stocks across 23 Developed Markets (DM) countries. 

 

     

 

 

 

INDEX PERFORMANCE — GROSS RETURNS (%) (SEP 30, 2024) 

 

Source: MSCI Research (here). 

 

 

Some key snippets from the past globally researched papers and studies by academics and practitioners, which highlights “how and why” momentum works, as below: 

 

 

What is a Momentum Fund? 

 

• Momentum Fund is a smart-beta strategy which focuses on selecting the top 30 or 50 stocks from a broader index (Nifty 200 / Nifty 500), based on their volatility-adjusted normalized momentum score. 

• For each eligible stock, the weighted average z-score is calculated on the basis of 6-month and 12-month momentum price returns. Top 30 or 50 stocks with the highest normalized momentum z-score are then selected. 

• Stocks eligible for inclusion in the index must have a minimum listing history of 1 year and the weight of each stock in the index is capped at 5% or 5 times the weight of the stock in the index based on free-float market cap. 

• For passive momentum funds, index rebalancing and reconstitution is generally done on a semi-annual basis. 

• Momentum Funds also have a high churn-rate resulting in a higher portfolio turnover and is therefore 10-15% more volatile than the broad-based Nifty indices (like Nifty 50, Nifty500, etc). It is also style and sector agnostic in nature. 

• In India, AUM of Momentum funds have seen strong growth over the past couple of years but is still highly underpenetrated, comprising just 0.3% of the overall MF AUM. 

 

 

 

Source: ACE MF. 2024 YTD data as on 30 September, 2024. 

 

Momentum Investing in India: 

 

In India, momentum investing is still relatively new, with only 2 active momentum funds available (Quant and Samco) and the balance 18-19 funds available on the passive side, such as Nifty200 Momentum30 Index and Nifty500 Momentum50 Index. 

 

• The Nifty500 Momentum50 and Nifty200 Momentum30 indices have both outperformed the Nifty500 on an absolute returns basis (>80% times) over the past 18 calendar years (see table below). 

• In cumulative terms, ₹100 invested in the Nifty500 Momentum50 Index and Nifty200 Momentum 30 Index as of 1st April, 2005 would have grown to ₹6,391 and ₹3,759, respectively by 30September 2024, compared to just ₹1,343 in the Nifty500 Index. 

 

Date	Calendar Year Annual Returns (%)
	NIFTY500 Momentum 50	NIFTY200 Momentum 30	NIFTY500
2006	56%	42%	34%
2007	124%	96%	61%
2008	-65%	-60%	-57%
2009	57%	64%	83%
2010	18%	17%	13%
2011	-22%	-18%	-28%
2012	51%	38%	32%
2013	11%	11%	3%
2014	68%	48%	38%
2015	10%	10%	-1%
2016	-3%	8%	3%
2017	65%	53%	36%
2018	-12%	-2%	-3%
2019	8%	10%	7%
2020	20%	19%	16%
2021	76%	51%	30%
2022	-9%	-8%	2%
2023	46%	40%	25%

 

Source: NSE Indices Data; Priced as on 30 September, 2024. 

 

 

 

Rolling Returns Performance Analysis of Momentum Indices: 

 

As highlighted above, Momentum Indices have massively outperformed the traditional indices based on point-to-point calendar year returns. Alternatively, we tested the returns performance of these indices on a rolling returns basis – which we feel is a much better metric as it gives a more comprehensive overview by calculating performance over various periods and economic cycles. 

 

Even on rolling returns basis, momentum strategies outperformed the Nifty500 Index. 

 

• The Nifty500 Momentum50 Index outperformed the Nifty500 Index in 84% of 3-year periods and 97% of 5-year periods since April 2005.  

• While, the Nifty200 Momentum30 Index showed even better results, outperforming the Nifty500 in 88% of 3-year periods and 99% of 5-year periods. 

 

3 Years Rolling Returns	Nifty500 Momentum 50	Nifty200 Momentum 30	Nifty500
Average Returns (%)	19%	17%	11%
Median Returns (%)	18%	18%	12%
% times Rolling Avg. Returns > 15%	57%	59%	34%
% times outperform Nifty500	84%	88%

3 Years Rolling Average Returns – “6,027” Observations: 

Source: NSE Indices Data. Data period: April 1, 2005 to Sep 30,2024. 

 

5 Years Rolling Returns	Nifty500 Momentum 50	Nifty200 Momentum 30	Nifty500
Average Returns (%)	18%	17%	11%
Median Returns (%)	20%	18%	12%
% times Rolling Avg. Returns > 15%	69%	64%	23%
% times outperform Nifty500	97%	99%

5 Years Rolling Average Returns – “5,297” Observations: 

 

 

 

Source: NSE Indices Data. Data period: April 1, 2005 to Sep 30,2024. 

 

 

Strong Resilience even in Market Downcycles 

 

We also studied the performance of Momentum Index funds during specific bull and bear cycles over the last 20 years.  

 

• Our analysis highlights that Momentum funds have proven to be slightly resilient during periods of sharp corrections vs. the Nifty500 and significantly outperformed the benchmark index in the upcycles.  

• For instance, during the Great Financial Crisis (GFC) period i.e. between March 2008 and 2009 – the Nifty500 delivered a negative return of 50% as compared to a negative 51% and 46% for Nifty500 Momentum50 and Nifty200 Momentum30 Indices, respectively. 

 

Source: NSE Indices Data.  

Note: For the above chart, we have shown absolute returns for cycles which lasted for ≤1 year and CAGR returns for >1 year. 
 

Drawdowns and Risk Evaluation: 

 

While momentum strategies offer superior returns in long bull cycles, they also come with higher volatility and steeper drawdowns (i.e. maximum downside from a previous peak) during sharp market corrections.  

 

• Standard Deviation. The annualized Std. Dev has mostly been higher for momentum indices vs. Nifty500, reflecting its relatively riskier nature and hence investing in momentum can sometimes be very challenging for risk-averse investors. 

• Drawdowns / Downside Volatility. During the Eurozone Debt Crisis period (Nov 2010 - Jan 2012); Nifty500 Momentum50 Index saw maximum drawdown of ~50% (vs. 35% for Nifty500) and similarly during the GFC period (Mar 2008-09); Nifty500 Momentum50 Index fell ~70% from its prior peak (vs. 65% for Nifty500). 

 

Net-net, Momentum is an aggressive investment style and generally has seen a strong & lengthy period of relative underperformance especially when there is sharp change in market cycles. 

 

Source: NSE Indices Data.  
Note: The annualized Std. Dev is calculated by multiplying the daily std. dev. by 
the square root of 250 (assuming 250 trading days in a year). 

 

Source: NSE Indices Data. Data period: April 1, 2005 to Sep 30,2024. 
 

Conclusion: 

 

1. Global Momentum Evidence: Momentum investing has shown a consistent return premium across different markets and asset classes, supported by over 200 years of data from developed markets like the U.S. and the U.K. 

1. Momentum in India: Momentum investing works well in India and have significantly outperformed traditional indices like the Nifty500 on both absolute and risk-adjusted return basis. 

1. Rolling Returns: Momentum indices have also shown a stellar track-record of outperforming the Nifty500 over both the 3-year (>80% times) and 5-year rolling return periods (>95% times). 

1. Drawdowns: While momentum strategies deliver superior returns during bull markets, they also experience sharper and longer drawdowns during market corrections, making them a riskier investment choice.