‘Momentum factor has outdone the broader market 75% of the times in the last 30 years’

Summary

In this insightful interview with Sanjay Balar, Head of Equities at Union Mutual Fund, we explore the growing trend of momentum investing. Sanjay discusses the current volatile equity market, the rationale behind launching the Union Active Momentum Fund, and the long-term potential of momentum as a factor. With momentum outperforming the broader markets over the years, the fund seeks to leverage strong price trends to generate higher returns. Active management ensures flexibility and protects investors from unforeseen risks, making it a compelling option for long-term investors seeking enhanced portfolio performance.

Takeaways

• 😀 Momentum investing has consistently outperformed in Indian markets, with passive momentum indices outperforming Nifty 500 Index 75% of the time.
• 😀 The Union Active Momentum Fund aims to capture the momentum factor in the Indian equity markets, which has delivered superior returns over time.
• 😀 After a 10-11% correction in the broader indices, the market is now priced fairly, offering a good risk-reward opportunity for long-term investors.
• 😀 Despite short-term volatility due to factors like geopolitical tensions and FII outflows, the long-term outlook for Indian equities remains positive.
• 😀 Momentum investing looks at the historical price trends of stocks, allowing investors to benefit from stocks with strong upward momentum.
• 😀 The Union Active Momentum Fund uses a rule-based, active management approach to filter stocks with the strongest momentum while also managing risks like liquidity and unforeseen events.
• 😀 Active management in the momentum strategy helps investors avoid risks such as sudden drops in stock prices and market changes, providing a safeguard for the fund.
• 😀 Investors should consider momentum funds with a long-term perspective (5+ years) and start with small allocations to build confidence in this new factor.
• 😀 The Union Active Momentum Fund offers a diversified portfolio that adapts to market conditions, without focusing on specific sectors or company fundamentals.
• 😀 Backtesting of the momentum strategy has shown promising results, but actual performance will be the true indicator, with long-term testing suggested for optimal results.

Q & A

What is the momentum strategy in equity fund management?

Momentum strategy involves selecting stocks based on their recent price trends, buying stocks that have been performing well and selling those with weak price trends. The idea is to capture the strength of these trends to generate returns.

Why has the momentum strategy been successful in India?

Momentum has worked well in Indian markets due to historical performance. Studies show that the passive momentum Nifty index has outperformed the broader Nifty 500 index 75% of the time, indicating its strong track record.

What is Sanjay Balar's outlook on Indian equity markets in the current volatile environment?

Despite current volatility driven by geopolitical tensions and FII outflows, Sanjay is optimistic about the Indian markets. He believes that the market is offering a favorable risk-reward scenario for long-term investors with a 3-5 year horizon.

How does Union Mutual Fund view the current market valuation?

After a 10-11% correction, Sanjay believes that the market is now fairly priced. The broader Nifty50 index is back to its fair value zone, making it an attractive time to invest from a valuation perspective.

What factors contributed to the recent correction in Indian markets?

The correction was primarily driven by two factors: a significant outflow of $14 billion by foreign institutional investors (FIIs) and weaker-than-expected consumption data in Q2 FY25.

What is the rationale behind launching the Union Active Momentum Fund?

The fund was launched to capture the momentum factor, which has shown strong performance both globally and in Indian markets. The goal is to offer investors the potential for higher returns by leveraging momentum trends.

How does the Union Active Momentum Fund differ from other equity funds?

Unlike traditional equity funds, which focus on fundamentals like earnings, the Union Active Momentum Fund uses a systematic, rule-based approach to select stocks based purely on momentum. This aims to generate higher returns by identifying stocks with strong price trends.

Why should investors consider a momentum fund when traditional funds have performed well?

While traditional funds like large-cap or mid-cap funds have performed well, a momentum fund offers the opportunity to tap into price trends that may outperform over the long term. It’s a different factor that can complement an existing portfolio and add value.

What are the advantages of actively managing a momentum strategy versus passive management?

Active management allows for better risk control, including the ability to quickly respond to changes in stock liquidity or market conditions. It also helps to mitigate sudden shifts in momentum and ensures that the fund remains aligned with its objectives.

What role does back-testing play in evaluating the Union Active Momentum Fund?

Back-testing helps evaluate how the momentum strategy would have performed in the past under various market conditions. Sanjay mentions that the back-testing results for the fund are promising, showing attractive risk-reward profiles.

How many stocks will be included in the Union Active Momentum Fund portfolio?

The fund will select stocks from a universe of the top 1,000 stocks. The exact number will vary depending on momentum strength and liquidity, with the fund manager adjusting the portfolio accordingly to maintain balance.