Momentum is rapidly gaining popularity among product providers and global asset managers as a key component in portfolio construction and tactical allocation to capture major trends and maximise returns with index and service providers offering new products to the structured products sell- and buy-sides.
The newly launched Eurostoxx 50 Multi-Asset Momentum Risk Cap Indices which allows a dynamic allocation between asset classes while being subject to a defined risk level via a volatility cap, is the latest example of the strategies available.
Stoxx released yesterday the new family of indices that implements a cross-asset strategy concept that is based on the Eurostoxx 50 and the Eurostoxx 50 Corporate Bond Indices, using the momentum factor for dynamic asset allocation to bolster returns, while maintaining the risk at pre-defined maximum volatility levels.
These indices are screened for high liquidity and are being pitched as a suitable underlying for financial products such as exchange-traded funds (ETFs) and derivatives, according to Matteo Andreetto (pictured), chief executive officer, Stoxx Limited. "[The new family of indices] will be very suitable for structured products issuers," said Andreetto.
"Empirical research suggests that the momentum factor is a systematic source of equity returns," said Andreetto. "Transferred into the cross-asset space, our performance analysis over the last five years indicates that the Eurostoxx 50 Multi-Asset Momentum Risk Cap Indices, which incorporate momentum strategies based on two asset classes, bonds and equity as represented by the Eurostoxx 50 and the Eurostoxx 50 Corporate Bonds Index, are able to deliver superior performance compared to single index investments into either the Eurostoxx 50 and the Eurostoxx 50 Corporate Bonds Index. The combination of momentum with a cap on volatility enables investors to profit from the performance-increasing effect stemming from the momentum factor while simultaneously being sensitive to risk."
According to Andreetto, Stoxx's multi-asset strategies are designed for market participants "who want to benefit" from the cross-asset exposure to core equities and fixed income within the Eurostoxx 50 universe. "The dynamic allocation strategy of the newly launched versions potentially increases performance, while simultaneously being sensitive to risk," said Andreetto. "This combination allows to construct efficient portfolios in accordance with individual risk preferences."
Andreetto believes the new family will resonate among structured products and ETF providers in the US and the European market. "We see a lot of demand from our clients for multi-asset strategies in the US but also in Europe," said Andreetto. "Especially the version with a volatility cap of 5.00% is expected to attract a lot of attention from clients that are comparably risk averse."
According to Andreetto, when investing in an ETF tracking such an index, an investor will gain exposure to a combination of equity and bonds that resembles his or her individual risk preference without the need to adjust the asset allocation himself over time. "In the field of passive strategies, these indices are actually very close to an actively managed multi-asset fund," said Andreetto. "We expect therefore that ETF issuers and passive fund managers will welcome an approach that is adding value for their clients while offering an innovative edge to their range of products."
The indices are rebalanced on a quarterly basis, are available in price and total return versions, and are calculated in euro. The launch yesterday was followed today by Trendrating's new version of its momentum analytics platform which includes a 'Portfolio Momentum Rating' to help fund managers enhance performance and reduce portfolio risk.
The analytics firm signed a collaboration agreement with FTSE Russell in Q1 2016 to develop new momentum indices that will incorporate Trendrating's 'unique momentum model' and supporting data as a core component of the methodology.
According to Trendrating CEO Rocco Pellegrinelli, fund managers can now run aggregated portfolio momentum analysis and immediately optimize strategies by limiting the exposure in underperforming stocks and ETFs.
'The new release of our solution is another step in facilitating the adoption of momentum metrics at a time when the momentum factor is gaining traction with active as well as passive managers,' said Pellegrinelli, in a statement. 'The ability to accurately measure exposure to the momentum factor is a major breakthrough in portfolio management.'
Trendrating's 'Portfolio Momentum Rating' will enable fund managers to measure a portfolio in terms of the overall momentum exposure for whole portfolios, baskets of stocks and indices via a rating grade (A,B,C,D). The resulting momentum profile is calculated on all the components and the specific weightings, and synthetized as a grade which can be used to establish and adjust the exposure of a portfolio to bull and bear trends.
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