Scientific Beta

Investment News New Zealand: "Momentum is one of the handful of share market ‘factors’ considered as permanent components in the quantitative investment engine. But while it has a good long-term record of delivering alpha over standard cap-weighted indices, the trend-following investment strategy can be dangerous on turns."

Investment News New Zealand 10/08/2025

"(...) Momentum is one of the handful of share market 'factors' considered as permanent components in the quantitative investment engine.

But while it has a good long-term record of delivering alpha over standard cap-weighted indices, the trend-following investment strategy can be dangerous on turns.

Or as Warwick Schneller, Scientific Beta head of investment solutions Australia and New Zealand, puts it in a paper due to air this week, the fast-following equity factor has been "punctuated by periods of extreme negative performance, referred to as 'momentum crashes'".

And momentum investors typically struggle to time a perfect exit from the speeding vehicle with few signs to highlight danger ahead.

However, the new Scientific Beta 'Crash-Tested: Rebuilding Momentum and Managing Crash Risk' study argues such pile-ups are to "some extent forecastable" based on market volatility gauges.

Schneller will debut the paper at the EQ Derivatives conference in Sydney, showcasing how a 'market volatility protection' mechanism can help momentum investors manage crash-risk better by reallocating to cash when market speed wobbles breach "a target threshold".

Meanwhile, the UK-based Scientific Beta chief, Nick Rankin, is slated for an Australasian visit later in August with meetings lined-up with KiwiSaver executives and other chief investment officers in NZ. (...)"