Do FTSE 350 sectors display a quarterly momentum behaviour that can be exploited?

The following chart shows the performance of a portfolio that each quarter comprises just one FTSE 350 sector, that being the sector with the strongest performance in the previous quarter.

So at the end of each quarter, the portfolio is liquidated and a 100% holding established in the strongest sector of the quarter just finished. This is held for three months, when the portfolio is re-balanced again. Each year there will therefore be four re-balancings. Only FTSE 350 sectors with at least three component companies are considered. The period studied was from 2003 to the first quarter 2014.

In the chart below the portfolio (Strong SMS) is plotted against the FT All Share Index (FTAS) for comparison – both series are rebased to start at 100.

Notes–

1. As can be seen, the momentum strategy out-performed the index over the period of the study. However, it did so with greater volatility; the standard deviation of the portfolio’s quarterly returns was 0.12, against a comparable figure of 0.07 for the FTSE All Share Index.
2. A refinement of the strategy would be to hold the two or three best performing sectors from the previous quarter instead of just the one (which would likely have the effect of reducing volatility).
3. Costs were not taken into account in the study. But given that the portfolio was only traded four times a year, costs would not have had a significant impact on the overall picture.

See also–

• Other Almanac articles on momentum.
• A sector rotation strategy by Mebane Faber
• Interesting article by Dominic Picarda, The 20% a year UK momentum strategy, in which he uses Datastream super-sectors, holds two sectors each time and re-balances every month. And, The 20% a year momentum strategy: risk-lite edition, where he adds filters to only buy sectors when they have actually risen and when the market as a whole is strong.