As a value investor it took me a long time (and a lot of research) to accept that stock price momentum is a very important factor that you must incorporate in your investment strategy if you want high returns.
The simple reason is that it works.
I summarised the most important points you should know about momentum here: 10 myths about momentum investing, squashed
When I came across Gary Antonacci’s book Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk I was very interested to learn what dual momentum was and if it can increase my investment returns.
I learned a lot from Gary’s book and recommend that you also read it.
I even wrote an article: How much can dual momentum increase your investment returns? to show you exactly how you can use the screener to implement dual momentum investing in your portfolio.
Interview with Gary Antonacci
As I mentioned in the article Gary is an interesting guy that has been active in investing for a long time.
I asked him if he would share some insights with you in an interview.
Gratefully he agreed to the following interview.
About Gary Antonacci
First a bit of background information on Gary.
Gary Antonacci has over 35 years’ experience as an investment professional focusing on under exploited investment opportunities.
Since receiving his MBA degree from the Harvard Business School, Gary has concentrated on researching, developing, and applying innovative investment strategies that have their basis in academic research.
His research on momentum investing was the first place winner in 2012 and the second place winner in 2011 of the prestigious Wagner Awards for Advances in Active Investment Management given annually by the National Association of Active Investment Managers (NAAIM).
As mentioned his research introduced the investment world to dual momentum, which combines relative strength price momentum with trend following absolute momentum.
He is author of the award-winning book, Dual Momentum Investing: An Innovative Approach to Higher Returns with Lower Risk.
Gary serves as a consultant and public speaker on asset allocation, portfolio construction, and momentum strategies. He licenses advanced dual momentum models to other investment professionals.
He is author of the popular blog Dual Momentum.
Now on to the interview.
How did you get started in investing?
Gary Antonacci: When I was at university, my grandfather sent me his old copies of the International Harry Schutz letter. I read about the yen being revalued, took my meagre savings to my local bank and exchanged it all into yen. They looked at me like I was crazy, but I made 10% on my money in one week.
Next I bought shares in a company no one had ever heard before, Sanyo Electric. I had to do it on the Tokyo exchange through a Japanese broker who could hardly speak English. I made 40% on my money and was hooked. I became an account executive at Merrill Lynch when I graduated, then got an MBA degree from Harvard.
I managed accounts there for other students, their families, and one of my professors. I’ve managed private funds or consulted to other investment professionals ever since then.
Describe your personal investment approach and how it developed over time?
Gary Antonacci: After researching the academic findings on momentum 7 years ago, I saw that it was a powerful factor, but that no one was using it to its full advantage.
After doing 2 years of research, I developed a methodology I called dual momentum that combines relative strength price momentum with trend-following absolute momentum.
Describe your investment philosophy?
Gary Antonacci: Momentum is one of the most heavily researched areas of modern finance. It has been shown to work consistently with nearly every asset class going back to the year 1800.
I use relative momentum to pick the best performing assets to invest in and trend-following absolute momentum to stay in those assets for as long as their trends are positive. The dual momentum logic is described in my book Dual Momentum Investing.
There are also easy to follow do-it-yourself instructions in it for implementing your own dual momentum portfolio.
What are your ideas concerning portfolio composition and the value of individual holdings in relation to the portfolio?
Gary Antonacci: Stocks have historically provided the highest risk premium, so stock indices are my core holding. I do not use individual stocks because momentum with stocks has high turnover and very high trading costs.
There are also scalability issues with many funds now doing momentum investing with stocks. Academic research has shown that stock indices produce better performance than individual stocks with momentum even before trading costs. After trading costs, the comparison isn’t even close.
How do you size position size in your portfolio? (Equally weighed / Volatility weighted?)
Gary Antonacci: I use equal weighted positions with my multiple asset dual momentum model.
My other models hold only one asset at a time. I diversify over time by rotating into the best performing asset. This prevents the performance drag and mediocrity you get from always holding weaker assets.
Can you describe your top investing mistakes and what you've learned from them?
Gary Antonacci: My top investing mistakes have been the usual behavioural ones.
Like most people, I’ve been swayed by emotion and impatience at times.
There is a natural tendency to become fearful when markets are falling (loss aversion) and to become greedy when markets are rising (regret aversion).
Fortunately, I managed hedge funds in the 1980s working with some of the best traders in the world like Paul Tudor Jones, Louis Bacon, Monroe Trout, and John Henry.
Watching their disciplined trading inspired me to develop my own rules-based models. I’ve done extensive research and back testing in order to have the confidence to always stick with my models.
Systematic trading goes a long ways toward overcoming discretionary mistakes.
How concentrated is your portfolio? Do you follow any key risk-management guidelines in managing your portfolio?
Gary Antonacci: We rely on diversification to earn higher profits and to control risk.
But we diversify temporally rather than all at once.
The best way I can describe this is to point out that the difference in performance between U.S. and non-U.S. stocks is due mostly to the relative strength or weakness of the U.S. dollar. It is impossible to be both long and short the U.S. dollar at the same time, so we use relative momentum to be fully invested in either U.S. or non-U.S. stocks, depending on which one has been stronger.
Similarly, we do the same with respect to whether we will be in stocks or bonds. When stocks have been strong, we are 100% in stocks so as to maximize our return. When stocks have been weak and their risk is high, we exit to the safety of bonds.
We are willing to endure the short-term volatility that comes from being 100% in stocks because we know that absolute momentum should get us out of harm’s way before we experience too much bear market risk exposure.
What is your view on the use of stop-loss strategies?
Gary Antonacci: Research by Andrew Lo and other academics shows that stop losses can be helpful. I have a blog post discussing that research.
Stops would be redundant for us though and would hurt rather than help our performance. The absolute momentum part of dual momentum does a better job of risk control for us.
What do you think of short selling?
Gary Antonacci: That depends on what markets you are talking about and your time frame for investing.
With commodities trading, short selling is very useful. For an approach like ours that tries to be in tune with the longer term trend of the stock market, it is not so helpful.
Given the long run upward drift in stocks, by the time we get short and then get long again, there wouldn’t be much profit there. We do better by being in bonds when we are out of stocks.
What is your 80/20 investment strategy or principle? (The most important 20% you must do to get 80% of the highest investment returns)
Gary Antonacci: The main idea behind dual momentum is to keep in tune with market forces. We do that by investing in the strongest stock indices when they are in an uptrend. We exit to the safety of bonds when stocks are weak.
Momentum investing is simple, but sticking with it may not always be easy.
How did the dual momentum strategy perform in 2015?
Gary Antonacci: I have a number of dual momentum models.
- Global Equities Momentum was -6.5%.
- Dual Momentum Sector Rotation was -3.7%.
- Global Balanced Momentum was +0.9%.
- Dual Momentum Fixed Income was +1.6%.
Over the long run, our dual momentum models have outperformed their benchmarks during both bull and bear markets. But from year to year, they can underperform at times.
Much of our outperformance comes from avoiding bear market losses. So you need to look at a full bull and bear market cycle before you can draw any realistic conclusions about the performance of dual momentum.
How do you think the zero interest rate policy will affect the Dual momentum strategy?
Gary Antonacci: Low interest rates during the past decade helped boost stock returns.
For the six years from 2009 through 2014, U.S. stocks were up 160%. Whenever there are extreme positive returns in stocks, it is difficult for any kind of trend following approach to keep up with it.
Low interest rates also meant lower returns when we switched from stocks to bonds. Now that interest rates are starting to rise, I expect to see dual momentum again perform better relative to its stock and bond benchmarks.
What if bonds and stocks are declining at the same time? Have we had a situation like that in the past?
Gary Antonacci: It has happened occasionally in the past. But we invest in bonds only when we are out of stocks.
Usually when stocks are weak on a cyclical basis, investors move to the safety of bonds and this helps support bond prices.
It is only in the last two decades we had a declining interest rate environment. What will happen if interest rates start rising and what will its impact be on the Dual Momentum strategy?
Gary Antonacci: It should help us. Shorter duration bonds should return more when interest rates rise.
Stock markets should also show better returns due to higher inflationary expectations that will be incorporated into their prices as interest rates rise.
Anything else you would like to mention?
Gary Antonacci: Find a proven investment approach that makes good sense to you. Carefully review its long-term past performance, especially its downside risk exposure.
If you are comfortable with it, then stick with that approach for the long run.
Gary, thanks for your time
Gary Antonacci: You’re very welcome.
PS To find out how dual momentum can increase your investment returns click here: How much can dual momentum increase your investment returns?