The ASX Momentum strategy works on the idea that stock prices that have risen significantly over the past, relative to their peers, tend to continue to outperform. This is known as the momentum effect and has been examined extensively in the academic literature. This strategy takes advantage of this effect by buying the top 5 momentum stocks in the S&P/ASX 100 index.
Latest Update – 15 January 2020
Today the ASX Momentum strategy was rebalanced as per the monthly rebalance schedule. As previously flagged to members, we have increased this to a 10-stock portfolio but members wishing to trade with 5 stocks can continue to do so. To help facilitate the change, we will split today’s advice depending on which version you wish to follow:
For those continuing with 5 stocks: The action required for today is to replace one stock. We will be selling Lendlease Group (LLC) and using the sales proceeds to buy Magellan Financial Group (MFG).
For those switching to 10 stocks: The action required for today is to sell Lendlease Group (LLC) and Qantas Airways Limited (QAN) and use the sales proceeds to take a position in Magellan Financial Group (MFG) and Beach Energy Limited (BPT).
Of the sold shares, LLC and QAN will realise a loss of 2.51% and 3% (approximately, based on Tuesday’s close prices). We generally recommend splitting the sale proceeds evenly between the new buys as well as picking up any dividends or additional funds that have been added in the prior month.
As a reminder, this strategy rebalances on the 15th of each month (or the next business day if the 15th is a non-trading day). For specific details of closed trades, please see our closed trades page.
For historical trade updates please click here.
|Stock code||Stock name||Rank||Qty||Entry date||Entry price||Current price||Current value||Return percentage|
Aristocrat Leisure Limited Ordinary
|146||17 Dec 19||$34.19||$36.98||$5,399.08||8.16%|
Beach Energy Limited Ordinary
|1,838||15 Jan 20||$2.72||$2.85||$5,238.30||4.78%|
Carsales.Com Limited Ordinary
|299||17 Dec 19||$16.67||$17.93||$5,361.07||7.56%|
CSL Limited Ordinary
|17||17 Dec 19||$278.12||$303.97||$5,167.49||9.29%|
Fortescue Metals Group Ltd Ordinary
|554||16 Sep 19||$9.02||$11.81||$6,542.74||30.93%|
JB HI-FI Limited Ordinary
|147||16 Sep 19||$34.08||$40.20||$5,909.40||17.96%|
James Hardie Industries PLC CDI 1:1
|199||23 Oct 19||$25.06||$30.22||$6,013.78||20.59%|
Magellan Financial Group Limited Ordinary
|80||15 Jan 20||$62.49||$64.10||$5,128.00||2.58%|
Resmed Inc CDI 10:1 Foreign Exempt NYSE
|227||17 Dec 19||$21.93||$23.16||$5,257.32||5.61%|
Xero Limited Ordinary
|64||15 Nov 19||$77.65||$85.34||$5,461.76||9.90%|
*Quantities are based on investing $5,000 per stock on the entry date
ASX Momentum Strategy
The ASX 100 index contains the largest 100 companies listed in Australia and therefore provides an excellent pool to find large capitalisation stocks that may exhibit the momentum effect. By searching this universe for stocks that have risen the most over the prior 6 to 12 months, we are banking on the previous momentum persisting for a good proportion of the chosen stocks.
Of course, not all trades will be winners, but according to the back-testing, the strategy closes 54.5% of trades with a profit and produces an average return of 17.9% for these trades. On the other side, the average loss per losing trade is only -6.8%. These statistics show why the strategy can produce a market-beating return over the long term, but they also show that it only works when an investor buys the entire portfolio. Picking and choosing individual stocks from this table has a reasonable probability of selecting a losing trade. Similarly, adjusting the portfolio when the strategy re-balances each month is essential to make sure you hold the optimal portfolio of stocks.
How To Follow This Strategy
Rivkin’s strategies are designed to be as easy as possible for investors to follow. To follow the ASX Momentum strategy, investors need to buy the stocks in the above table in equal weights. Weights can drift over time as stock prices move, but we only recommend re-balancing stock weights if they stray too far from the target weight (20% per stock). The stock volumes shown in this table are based on a $5,000 investment per stock which produces a $25,000 portfolio.
Once per month, the list of stocks will be updated in what we call a ‘re-balance’. This means investors will need to look at the new list and sell any stocks that are no longer on the list. After these stocks are sold, the new stocks from the current table can be bought.
About The Strategy
The ASX Momentum strategy was developed by Rivkin during 2015 and was rolled out as a strategy to clients in May 2016. Extensive back-testing was done to create and refine the strategy, and it is this back-testing that we rely on to give us increased confidence about future expectations. Please click here to find out more about the strategy.
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