Samco MF has launched an Active Momentum Fund, a first in India. It will be a thematic fund that aims to invest in stocks that are showing momentum characteristics using a proprietary momentum-seeking algorithm. The momentum fund space in India, so far, has seen a spate of passive product launches (index funds and exchange-traded funds). The NFO opens June 15 and closes June 29. Let us take a deep dive into the new offering.

What is momentum strategy

Momentum stocks are such that exhibit positive price momentum – based on the phenomenon that stocks which have performed well in the past relative to other stocks (winners) continue to perform well in the future, and stocks that have performed relatively poorly (losers) continue to perform poorly. Let winners run and cut losers fast --- this is the basic premise.

Historical research conducted by MSCI World Momentum Index substantiates that the Momentum factor has consistently proven itself as one of the most potent generators of alphas.

Momentum investing is based on that gap in time that exists before mean reversion occurs in a stock. Momentum is usually seen in the short- to intermediate term. If the stock market moves mimic waves in the ocean, a momentum investor sails up the crest of one, only to jump on to the next wave before the first wave crashes.

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Typically, funds or portfolio management schemes that follow the momentum style use rule-based frameworks that single out stocks with high risk-adjusted momentum scores, within a time period, say, 12 months.

Momentum indices in India over various time periods have out-performed benchmarks.

Investment approach

Samco Active Momentum Fund aims to invest in stocks that are showing momentum characteristics, such as breakouts, price leadership, etc., using a proprietary momentum-seeking algorithm.

Since this will be an actively-managed fund, investors should understand how stock selection will work. The fund will look for stocks that exhibit momentum in price and/or earnings growth, in other words, they are price leaders in a specific period of time. The scheme will typically buy stocks when they exhibit strong price breakouts and exit stocks when they exhibit price weakness.

The scheme aims to be overweight outperforming stocks/sectors relative to its parent index and adapts itself as the market outperformers change. The fund’s portfolio will be constructed with 50-70 stocks. The investible universe of the fund doesn’t appear to have any market cap bias. Hence, large, mid, small and even micro-cap stocks could be present. The fund will be benchmarked against Nifty 500 TRI.

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There are phases of deep falls/bear markets from time to time. In periods of anti-momentum, the scheme shall hedge positions and while Gross equity exposure in momentum stocks to remain > 80%, Net equity exposure could reduce to 0% in times of extreme anti - momentum. This can be done using hedging and arbitrage.

Conversely, when momentum conditions thrive in the stock market, the fund’s gross and equity exposure can be up to 100% of assets.

Active versus passive momentum strategies

The passive mutual fund products based on momentum largely track either the Nifty 200 Momentum 30 Index or the Nifty Midcap 150 Momentum 50 Index. Using an index has its own advantages. Yet, playing momentum factor in an actively-managed portfolio has its own pros. Let us understand the differences.

One, exposure to momentum stocks can be managed in an actively managed offering but it is 100% exposure always in a passive product.

Two, portfolio rebalancing can be done at the drop of a hat in an active scheme but the same is done usually only once in 6 months in passive schemes.

Three, passive schemes based on momentum are said to capture only relative momentum in stocks while active schemes can capture both absolute and relative momentum.

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Four, at the same time the frequent shuffling of active momentum portfolios means the fund is expected to have annual turnover in excess of 100% and bear higher transaction costs.

Take a look below to see how existing momentum-based passive funds have performed.

Other details

Samco Active Momentum Fund will be managed by Paras Matalia (head of equity research).

There will be an exit load of 2.00% if the investment is redeemed or switched out on or before 365 days from the date of allotment of units. The load drops to 1.00% if the investment is redeemed or switched out after 365 days but on or before 730 days from date of allotment of units.

As per a fund house release, subscriptions will not be accepted after the NFO period until further notice. Furthermore, only those Systematic Investment Plans (SIPs) registered during the NFO period will be accepted, with fresh SIP registrations will temporarily be restricted post NFO until further notice

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Our take

Samco Active Momentum Fund comes from a new fund-house and hence any decision to invest shall be based on faith on the fund management team’s capability, especially given the trading slant to the underlying strategy. Previously launched Samco Flexi Cap and Samco ELSS Tax Saver products are also new offerings.

Actively-managed momentum funds are a new product in the MF space and hence it’s best to give the new scheme time to build a track record. There needs to be evidence in terms of live performance that actively-managed momentum funds can beat the passively-managed momentum indices., not just broad benchmarks.

For investors willing to experiment with the new fund offering, bear in mind thematic funds should form only 10-15 per cent of your overall portfolio depending on your risk appetite/profile.

Key points to note
First actively managed momentum based fund
No market-cap bias, will use algorithm to spot opportunities
Offering comes from a new fund-house
NFO opens June 15 and closes June 29