AQR Capital Management
has launched three new indexed mutual funds that seek to bring momentum-style investment options to investors. The funds, whose net expense ratios range from 49 basis points to 65 basis points, started operations on Thursday with assets of $2 million apiece.
Thursday's launch comes on the heels of the rollout of Greenwich, Connecticut-based AQR's debut mutual fund, AQR Diversified Arbitrage Fund
, earlier this year.
The new products -- AQR Momentum
, Small Cap Momentum
and International Momentum Funds
-- are based on a new set of three momentum indices developed by AQR: the mid- and large-cap AQR Momentum Index, the Small Cap Momentum Index and the International Momentum Index.
The momentum indices, which are rebalanced quarterly, rank stocks in their relative investment universes by their total return over the prior twelve months (excluding the most recent month). The top 33% of stocks are selected for inclusion, and are then weighted by market cap.
In an interview with The MFWire
on Friday, AQR principal Ronen Israel
said the concept of momentum is an important addition to the existing dichotomy of value/growth methodology.
"This is a turning point in terms of establishing momentum as a style," Israel said. "Our funds are the first momentum funds that are presented in an accessible, intuitive, comprehensive way. There is currently nothing out there that has an intuitive approach."
"Momentum has had similar academic success and interest on the heels of all the academic work done on value and growth, but no one has thought of momentum as a stand-alone investment style. We think we can change that perspective by offering investing style surrounding the strategy," he added.
The new funds are being marketed for their value as portfolio diversifiers that can serve as replacements for growth investing and a complement for value strategies. The index and fund launches were accompanied by the release of an AQR white paper titled The Case for Momentum Investment,
which touted the funds as a means by which portfolios can add higher risk-adjusted returns.
"One of the nice features of the funds is the diversification with value," Israel said. "Value investors adding momentum to the portfolio improves things."
While he did not go into specifics, Israel noted that AQR is definitely interested in continuing to develop momentum-based indexes and products that would apply momentum strategies to narrower slices of the market.
Company Press Release
AQR Capital Management launches Momentum Indices and Momentum Mutual Funds
A Paradigm Shift in Investing
July 10, 2009, Greenwich, CT -- AQR Capital Management, LLC today launched the AQR Momentum Indices, a new set of indices that capture the returns of stocks that have positive "momentum." A stock has positive momentum if it has outperformed its peers on a relative basis over the recent past.
The three indices are: AQR Momentum Index, AQR Small Cap Momentum Index, and AQR International Momentum Index. In conjunction, AQR also introduced a set of three no-load mutual funds based on these indices: the AQR Momentum Fund, AQR Small Cap Momentum Fund, and AQR International Momentum Fund.
"When the world thinks about diversifying portfolios, the conventional approach has been to think in terms of two style dimensions – value versus growth, and large cap versus small cap. However, there is another dimension which is just as important in explaining returns, and has been largely under-allocated given the current two-style investment paradigm; this is momentum," said David G. Kabiller, CFA, Founding Principal and Head of Client Strategies at AQR.
Momentum has been researched extensively over the past fifteen years by both academics and practitioners. In contrast to the efficient market hypothesis, which maintains that past stock prices have no predictive value for the future, the research on momentum suggests that stocks with positive momentum tend to out-perform market averages in the following months.1
The new AQR Momentum Indices provide a simple and transparent2 way of capturing the momentum effect. The indices, which are rebalanced quarterly, are formed by including those stocks that rank in the top third of their relevant universe based on momentum over the prior twelve months.
"What makes momentum such an attractive strategy is that it combines two desirable qualities: momentum tends to do well when value is out of favour, yet unlike growth its long-run returns have out-performed broad market averages3," said Kabiller. "We believe that a combination of value and momentum is a better way to build diversified portfolios than the more traditional value and growth combination."
AQR is an intellectual leader in the field of momentum investing. As a doctoral student, AQR founder Cliff Asness was one of the early academic writers on the concept, and the AQR team has extensive experience implementing momentum strategies in actual portfolios4.
"Momentum is an investment concept that has been known and researched for years, but the strategy has not been easily accessible to investors in its pure form, and consequently most investors are substantially under-invested," continued Kabiller. "AQR is introducing the Momentum mutual funds as a cost-effective way to access this proven approach. The launch of these new funds furthers our efforts to provide clients with innovative ways to gain diversification for their portfolios."
The funds have a minimum investment of $5,000, and net expense ratios ranging from 0.49% to 0.65%. The funds began operations yesterday, with assets of $2 million each. The AQR Momentum funds follow the launch of AQR’s first mutual fund, the AQR Diversified Arbitrage Fund, earlier this year.
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