It seems that with the rise of social media and business news channels one would hypothesize that the time period for measuring momentum as a factor in allocating equity markets has gotten shorter. This analysis looks to see if using 3-month momentum would have added value to country allocation – especially over the most recent years.  

The Heckman Global Equity Allocation Model uses a smart beta (factor based) approach to allocating the markets. Currently, in the Heckman Country Allocation Model, we use 13 investment indicators which fall into the categories of valuation, growth, risk, monetary policy, and momentum.  Under momentum, we currently use momentum measured over the last 12 months for each market. This analysis tests whether shorter term momentum (3 months) would have added value as a factor for country allocation.  In other words, if one overweights markets with higher 3-month momentum and underweights markets with lower 3-month momentum, would this strategy have outperformed the relevant MSCI index return. 

In the Heckman Global Equity Allocation Model, we calculate a score for every market each month based on the indicators.  Using momentum as an example, we start with MSCI benchmark country capitalization weights, and we rebalance the portfolio by assigning overweights to markets with higher-than-average momentum and underweights to markets with lower-than-average momentum. Each country gets an overweight or underweight allocation relative to the benchmark that is roughly in proportion to the difference between its score and the cross-market average score (with restrictions on the maximum allocation possible to small markets to avoid unrealistically large exposures). The portfolio is updated each month and performance returns (gross of transactions costs) are calculated monthly. Returns from the strategy can then be measured relative to the relevant MSCI benchmark returns.

In this analysis, we constructed the 3-month momentum factor in two ways:  in local currency terms and in $US terms. There were two country universes tested: MSCI All-Country World universe (developed and emerging) and MSCI Emerging Market universe. We divided the alpha into 10-year periods since January 1989 and with the most period being January 2019 through July 2023 – obviously less than 10 years.

For the MSCI ACWI universe, as can be seen from the Charts 1 and 2, a positive alpha was produced for the first two ten-year periods from January 1989 through December 1998 and January 1999 through December 2008.  However, for January 2009 through December 2018 and the most recent period of January 2019 through July 2023, this factor for country allocation would have produced negative alpha relative to the MSCI ACWI Index return. 

Chart 1

Chart 2

For the MSCI Emerging Universe, as can be seen from the Charts 3 and 4, the 3-month momentum factor measured in local currency would have outperformed from January 1989 through December 2008.  This is not the case of the $U.S. 3-month momentum factor since it underperformed during the January 1989 through December 1998.  In addition, since January 2009, there is no clear pattern for outperformance over the MSCI Emerging Market Index either when the 3-month momentum is measured in local currency or in $U.S.

Chart 3

Chart 4