Market Forces and Security Selection

Question:

Discuss about the Asset Management for Combining Value and Momentum.

At ABC Asset management, market forces are the determinants of security selection. We believe that for a market to be efficient at all costs, the biases of the individual investor will greatly and fundamentally impact on the security of a company selection. The core believe of ABC Asset management is that an investor will always react in an irrational way or manner to influence the market price given new availability of information relation to any asset  (Fisher, Shah, & Titman, 2015). The investor will become susceptible and unconscious anchoring that is brought about by market prices to floors and ceilings.Inefficiencies in the market results in a stock being either undervalued or overvalued and at ABC Asset management we believe that there has been too much emphasis placed on share price and its performance to the detriment of the real and true valuation of the stock of the company (Jegadeesh & Titman, 1993).

We implement the strategies of asset management due to these factors that affect the stock price. Both momentum and investment value are the strategies that inefficiencies create within the market.The strategies help in identifying the stocks that have been undervalued or overvalued and we help the investor to make a prudent decision while investing.At ABC Asset management, identifying the undervalued and overvalued assets or stocks by our team help to make a decision that will be used by the investors in producing market returns that are above the buying price of the investor. Strategies and investment philosophies should always be used to give a better return to an investor or to manage the expectation of the investor in case of losses. However, at ABC Asset management, it is our duty to use investing philosophies that will eventually lead to good returns (Sharpe, 1992).

The investment strategies  that we use at ABC Asset management are momentum and value investing to goal of producing the greatest profit from our investing endevours. For ABC asset management we are able to use  signals in the market that are identified by the two strategies. ABC asset management uses knowledge that we get from the two strategies to invest  by allowing us to use negative information signals from the market (Jegadeesh & Titman, 1993).   The two strategies enables us as ABC asset management to  be exposed to all  information that is currently available in the market to be able to make better investment decisions. The company invests in securities which based on past performance will have momentum to carry them into the  subsequent months. Momentum premium notion is what we focus on to outperform the market  (Fisher, Shah, & Titman, 2015).  To be specific, we target stocks which are 52 week high or close at that particular time.  Traders use the 52 week high as a point of reference in which they evaluate what would be the impact of any news on the securities (Sharpe, 1992)

Implementing Momentum and Value Investing Strategies

By investing on the top 25% of securities, we exploit the less perfect market conditions created by the unwillingness by investors to breach the 52 week high.  The choice by ABC asset management to use momentum analysis is based on the evidence found (Sharpe, 1992), which relates to the efficacy of the 52 week high portfolio and the momentum premium. The momentum premium suggests that on average those who win realized returns that were significantly higher as compared to the market.  It also suggests that that abnormal returns were only short lived, with over half of the securities returns dissipating in the two years that follows.   Therefore, as ABC asset management,  we carry out annual rebalancing to minimize or avoid the possibility of making significant loss over the years following the development of the portfolio. On average, there was a monthly average of 1.24%  in terms of returned monthly wage for the 52 week high portfolio, which is much greater than the JT portfolio that returned an average of 0.97% and MG portfolio which returned a monthly average of 0.50%.  We then provide a portfolio based on the value that the securities can provide us to get the maximum return (Sharpe, 1992)

In order to develop further the selection of stocks , ABC asset management  company introduced a screening process that enables us to determine the weight of the stocks that have been identified by the 52 week high process. This allows us to have a greater in depth look into under pricing severity that is caused by investor bias.  At this company, we use the dividend yield and book to market ratio as the two major methods of screening to come up with a portfolio of the stocks that we want to invest in. This is done by the 52 week high process.  Under pricing is mostly reflected during these screens because individuals and investors present personal bias towards the prices of the securities in a way that they give rise to a value premium. Hence under pricing is what we as ABC asset management seeks to exploit (Sharpe, 1992)

One way to anticipate variations in the trend of prices is the analysis of divergences between the momentum indicator and the line of price variations, that is explained in the momentum indicator analysis

Divergences in momentum indicator. The momentum strategy is based on the idea of ??choosing actions that show a price increase, both in relative terms and in absolute terms. The logic behind the momentum strategy is based on the persistence of the forces that govern the markets and therefore, the values ??that rise higher, will continue to rise.

Choosing Undervalued and Overvalued Stocks

As I mentioned earlier the strategy of Momentum is based on the idea that the values ??that rise higher, will continue to rise. The momentum indicator is a trend indicator, ie if the momentum is positive it implies that the price is growing gradually and a bullish strategy is adequate. On the other hand, if the momentum is negative, it means that the previous level is being lost and shows a downward trend (Keppler, 1991).

A momentum investor invests in assets that have good indicators at present and usually value that the price is in an upward trend in the medium term. A momentum action is usually a company that presents solid financial results, positive news flow and growing recommendations from leading analysts.

To know more trading strategies do not hesitate to check this post: What is your trading strategy

Trading Techniques for Investors.As we have seen in the post, the momentum strategy is based mainly on the analysis of the momentum indicator and generally, the agreement of this with the value of the price of the asset in question. Apparently it is a simple strategy, but it requires both analysis of variations in indicators and information of all kinds about the company in which we want to invest, making sure that our predictions can be coupled to the financial reality of the same (Keppler, 1991).

The screens that were chosen are very effective in enabling us to produce abnormal profit.  Different studies have produced evidence that shows that investors tend to analyse the past performance of a stock and extrapolate past book to market ratio which under prices low book to market  firms. (Keppler, 1991) suggested that  book to market ratio is very effective when one wants to determine the future price of a security. According to other studies,  various authors indicated that in an extensive period of time the market was out performed by book to market ratio. ABC asset management secondary screen focuses on each individual stocks profitability. Rebalancing annually allows our company to earn high dividends from the yields of the stock.

Weighing stocks within a portfolio is critical in order to maximize the return of our investment. This process is done carefully because it complements the stocks selection. Returns generated by the security can be greatly affected by the proportion that the portfolio has been divided by. After the selection of the stocks have been conducted , we weight the stocks selected based on their market capitalization. Firms with a big market capitalization are apportioned with a larger portion of the portfolio. Those with a lesser market capitalization are apportioned with a lesser portion of the portfolio. To provide optimal returns in future, it is important to do a portfolio rebalancing that is carried out yearly  (Athanassakos, 2012)

Using Signals to Make Investment Decisions

It is agreeable that the selection accounts on security are substantially variable in the returns of portfolios.The selection of any security will envisage the beliefs of ABC Asset management and the desires that are stated in the philosophy of the investment that is to increase the returns of the stock. Our systematic trading systems a strategy that largely is influenced by the momentum and value of the stock in investing across the year.The strategy of ABC Asset management company is a an all year round momentum approach that involves the historical value of the company. With a team of experts and a 52 week momentum approach, our team uses a two value screen that also uses market to book ratio and the dividend yield ratio to create a momentum and value focused strategy. It creates a value twist in the stock that the investor is interested in. it creates two levels or stages that helps to scrutinize the selection process of any given security   (Fisher, Shah, & Titman, 2015)

Due to empirical evidence obtained by our team at ABC asset management, there is a ranking that is done within the 52 week time or within the year. It creates a good support for a successful strategy in momentum. Hwang and Georges in their submissions on stock states that this will only deliver positive results due to the ability of the team to predict the behaviour of a stock due to extreme returns in the past. It also shows the difference between the profitability and the stock risk and how to invest to increase the return within a specified time. In historical data analysis, they showed that the strategy comparison will result in a higher return that is twice as large in approximation. It also shows that the optimal performance will come from the medium periods of the year that is the period between the third and the twelfth month of the year. We at ABC Asset management believe that from a perspective of time horizon, the best screen will be used for positive annual return.

For selection of a security, utilization of market to book ratio will lead to a positive investment approach which provides the best and clearest way of future returns predictions. This was the first value screen as predicted and used by ABC Asset management. The second value screen was dividend yield that is used in the selection of equities allowing a detailed plan in value assessment.The market to book ratio is an effective tool that does not only use historical information of a stock but also the predicted asset value that is being assessed  (Huang & George,2004)

ABC asset management endeavours to have a strategy in investment that will bring both momentum and high value for the investors.Security rankings have been created from the dividend yield ratio and the market to book ration to give the 52 week high value for the investors. Restructuring of a portfolio will create a value based system in the stock analysis strategy. For optimal future performance, the portfolio is rebalanced in an annual basis for momentum and value based strategy. This security optimum high week will create a momentum that is 50 precent and also a 50 precent value investing arrangements that will guide in allocating the best 20 domestic equities. The strategy of ABC Asset management company is a an all year round momentum approach that involves the historical value of the company   (Fisher, Shah, & Titman, 2015).Our investment philosophy helps focus specifically on the value created when a stock is bought by an investor and the risk that the stock poses to the investors return (Fisher, Shah, & Titman, 2015). Market to book ratio is quite an appropriate tool in setting the investing philosophy by our asset management company. Dividend yield is also an appropriate tool in determining which stock to focus in. The higher the dividend yield the better the chances of investing in the company.  We at ABC Asset management believe that from a perspective of time horizon, the best screen will be used for positive annual return.At ABC Asset management, identifying the undervalued and overvalued assets or stocks by our team help to make a decision that will be used by the investors in producing market returns that are above the buying price of the investor  (Huang & George,2004).

References

Athanassakos, G. (2012). Value Investing Vs. Modern Portfolio Theory. Journal of Business &Financial Affairs.

Fisher , S. T. (2015). Combining Value and Momentum. Journal of Investment Management, Forthcoming.

Fisher, G. S., Shah, R., & Titman, S. (2015). Combining Value and Momentum. Journal of Investing Management.

George, T. J., & Huang, C. Y. (2004). The 52-Week High and Momentum Investing. Journal of Finance.

Jegadeesh, N., & Titman, S. (1993). Returns to Buying Winners and Selling Losers:Implication for Stock Market Efficiency. Journal of Finance, 65-91.

Keppler, M. A. (1991). The Importance of Dividend Yields in Country Selection. Journal of Portfolio Management.

Sharpe, W. F. (1992). Asset Allocation: Management style and Performance Measurement. Journal of Portfolio Management, 7-19.