Momentum is an investment style that has been studied extensively by academics for many years, but that is still largely “undiscovered” as a mainstream building block for investor portfolios. Momentum is now being recognized as a major investment style of equal importance as the value-growth and the large-small cap dimensions.

The evidence for momentum is pervasive and supported by almost two decades of academic and practitioner research. Studies have documented momentum in the U.S. as far back as the Victorian age. The evidence also shows that momentum works broadly across asset classes, including foreign stocks, bonds, commodities, currencies, index futures, and global country selection.

AQR has developed an index methodology that captures momentum in an intuitive and transparent way – making it accessible to investors. The methodology can be applied to any universe of stocks. At present, AQR has created momentum indices for three distinct markets:

• The AQR Momentum Index (Large Cap and Mid Cap U.S. Equities)

• The AQR Small Cap Momentum Index (Small Cap U.S. Equities)

• The AQR International Momentum Index (Non-U.S. Equities) 

Each of the indices is constructed using a simple and transparent methodology that captures the essence of the momentum effect:

• The investment universe is screened based on market capitalization, liquidity, and other considerations.

• The stocks in the investment universe are ranked by their total return over the prior twelve months, excluding the last month.

• The top 33% of stocks with the highest rank are included, and weighted based on their market capitalization.

• The index is reconstituted quarterly.

Based on over 25 years of historical data, the AQR Momentum Indices have the following desirable properties:

• Performance. The AQR Momentum Indices each outperform a comparable core index over the period studied. They also outperform other investment styles such as value and growth.

• Volatility. The AQR Momentum Indices are somewhat more volatile than the comparable core indices, but similar in volatility to growth indices.

• Sharpe Ratio. The Sharpe ratios of the AQR Momentum Indices are higher than their comparable core indices and similar to those of value indices. When considered relative to a comparable core equity index, the information ratios of the AQR Momentum Indices are higher than those of growth or value indices.

• Correlation. The excess returns of the AQR Momentum Indices over a core equity index are positively correlated to the excess returns of a comparable growth index, and negatively correlated to the excess returns of a comparable value index.

These characteristics make the AQR Momentum Indices a valuable tool for a variety of investors:

• Growth investors will find that momentum offers much better performance at comparable volatility.

• Value investors will find momentum to be an effective complement to help reduce tracking error to the broad market indices.

• Value-growth investors, or investors in a broad core market index, should consider replacing momentum as an alternative to their growth allocation.

The white paper entitled “The Case for Momentum Investing” provides an in-depth look at the AQR Momentum Indices and their historical performance.