Ryan Coleman
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Ryan Coleman
Momentum at Naviquant Capital Management
“The only constant is change.” (Heraclitus – Greek Philosopher)
Opening our first blog with a cliché may seem like an odd choice, but that does not make it any less true. At Naviquant Capital Management (NCM), we recognize that change is always happening; we embrace it, and even consider our firm to be built from it. Our intent is to develop this firm into an adaptive practice that can evolve with the shifting needs of our clients, and the outside forces that are the catalyst for this change.
The earliest beginnings of NCM began several years ago, on the back of a 2017 model built by co-founder Jocelyn “Joce” Servignat. During his research into optimizing portfolios for clients, he came across many investing and trading methods. His interest was piqued by the world of factor investing.
Factor investing is defined as “a strategy that chooses securities on attributes that are associated with higher returns”. There are many examples, but some of the early factors include: value, growth, market cap, and low volatility. In the arena of factors, these are only a small substratum and many in the field argue that there are hundreds of factors that people may use to invest. These factors have given rise to a plethora of theses, some of which are more unique than others. In the end, Joce settled on momentum as the basis for his investment model. Its definition may sound slightly similar to that of Isaac Newton’s first law of motion, “An object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.”
Momentum investing is based on the idea that securities that have performed well will continue to do so, while poorly performing securities will also continue their downward trajectory. In relation to trade factors, momentum does not exclusively depend on a number to explain the factor (i.e., size\market cap, value\valuations, etc.). The proposition is that the behavioral biases of buyers greatly affect the movement of securities. In its simplest form, as more and more people buy, further will follow until some unforeseen negative news changes the course of market trends. Behavioral finance plays a large part in the premise of momentum investing. There are biases that exist among investors that determine how they invest. A few examples shed light on the premise behind momentum investing:
Herding – This is a bias that refers to investors following or copying what other investors are buying or selling. Example: MEME stocks and the runup of Game Stop.
Overreaction – when a security is bought or sold excessively to psychological behaviors and not fundamental analysis.
Disposition Effect – Investors bias to sell rising securities too early and hold onto faltering securities for too long.
Momentum is the keystone to us at NCM. We use it in relation to most facets of our business and one of the best examples lies in the way we structure our clients’ investment portfolios. We start with the two most crucial factors, which are the risk profile and objectives of each client. This gives us the maximum risk level that our client will be comfortable with. Our momentum strategy will then reallocate assets, periodically, within that maximum risk level to adapt for the ups and downs of the equity or fixed income market. In other words, our portfolios are customized and dynamic.
In the near future we are going to be sub-advising a Collective Investment Trust (CIT) with Alta Trust for new and existing 401(k) clients, and we intend to outsource our model to other advisors. As with all areas of our business, the core of our strategy will be built off momentum in the simplest of definitions.
Co-founder’s note: So, this is our first blog, yup, we did it. We are now made official in the financial world with the million plus blogs written (not an actual verifier, and not an accurate number). All joking aside, we want our friends, clients, and new followers to understand who we are and why we are here. At NCM we intend to publish more material based on our momentum model, the markets, and our client conversations. We look forward to having a conversation with you soon!
NAVIQUANT CAPITAL MANAGEMENT is a registered investment adviser registered with the United States Securities and Exchange Commission. Registration does not imply a certain level of skill or training. The views and opinions expressed are as of the date of publication and are subject to change. The content of this publication is for informational or educational purposes only. This content is not intended as individualized investment advice, or as tax, accounting, or legal advice. Although we gather information from sources that we deem to be reliable, we cannot guarantee the accuracy, timeliness, or completeness of any information prepared by any unaffiliated third-party. When specific investments or types of investments are mentioned, such mention is not intended to be a recommendation or endorsement to buy or sell the specific investment. The author of this publication may hold positions in investments or types of investments mentioned. This information should not be relied upon as the sole factor in an investment-making decision. Readers are encouraged to consult with professional financial, accounting, tax, or legal advisers to address their specific needs and circumstances.