A value strategy means investing in undervalued companies with strong fundamentals that are trading below their intrinsic value and are out of favour from a price perspective. The expectation is that, eventually, these companies will show a strong upward price movement.
On the other hand, momentum strategy focuses mainly on the upward price trajectory of the companies and invests in those that are currently in high demand and whose prices are expected to increase rapidly.
Over the years, both strategies have complemented each other effectively, especially when applied through the right, true-to-label products. They have performed well across bull and bear markets, helping investors maintain consistency and limit underperformance at the overall portfolio level.
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Which strategy is the winner?
To find out, we have considered two broad-based smart beta indices: the Nifty 500 Value 50 Index and the Nifty 500 Momentum 50 Index. We have considered 3-, 5- and 10-year daily rolling compound annual growth rate (CAGR) returns since their inception on 14 November 2024. The data clearly shows that momentum strategy has outperformed value strategy 65%, 78% and 97% of the time, displaying better outperformance and consistency, especially on a 10-year rolling returns basis.
Value strategy, on the other hand, has been cyclical and has outperformed in cycles on a 3- and 5-year rolling returns basis.
Let’s look at the average CAGR generated by the two strategies for 3-, 5- and 10-year daily rolling basis. While momentum generated 20%, 19.6% and 20.5%, value investing gave 15.7%, 13.5% and 13.2%.
The data shows momentum strategy has displayed higher average returns, better maximum returns, lower downside, and reduced cyclicality compared to value strategy. Therefore momentum strategy seems to be the clear winner in term of managing both risk and returns.
This raises the question: Is the value strategy a loser? In the context of smart beta passive investing, yes. However, one must not forget that both strategies have active funds managed by fund managers.
The right way to play the value theme is by investing in active true-to-label value funds. Value investing requires a value picker, one with thorough human intervention possessing in-depth intelligence and foresight to identify the right value companies based on fundamental, technical, and sentimental analytical skills. Even though active value strategy has shown long spells of cyclicality and has performed in cycles, it is crucial not to ignore the selected quality active value funds which have shown strong outperformance.
On the other hand, since momentum strategy requires precise capturing of price momentum, algorithm-based smart beta passive momentum strategy has worked well with a robust track record. The best way to play this theme is by investing in a broad-based smart beta passive momentum strategy like the Nifty 500 Momentum 50, which has managed to show not only higher consistency but also outperformance, all at a low cost.
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To conclude, as per historical data both strategies perform in cycles, with momentum strategy working well, especially during bull market cycles, while value strategy shine during recovery and bull markets.
Momentum strategy has proven to be more consistent and value strategy to be more cyclical. Ideally, if an investor has a long-time horizon, investing in a ratio of 50:50 in both strategies makes sense. However, looking at the cyclicality of value strategy one may consider a higher allocation to momentum strategy to maintain consistency and outperformance.
(Rushabh Desai, founder – Rupee With Rushabh Investment Services. Views are personal.)
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