Attractive rule-based single stock strategy

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The future of digital wealth management
03.03.2017
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Rule-based approaches have long proven their worth in the selection of ETFs. Even attractive single stocks can be reliably identified, for example with a momentum strategy.

D The prices of individual stocks are naturally more volatile than those of ETF, which reflect a broadly diversified market. This makes stock picking challenging, i.e. the clever selection of stocks that perform better than the market. The so-called "momentum", a measure of the strength of its development in the past, is a proven indicator of future share price trends.

„The factors that gave a stock a boost in the past often provide a longer time for the backwind. This can be used for rule-based selection."

 

Strong trends often last long

The factors that gave a stock a boost in the past often provide a longer time for the backwind. This can be used for the selection: stocks that have moved upwards for a long time often still benefit from this momentum. Financial market research has extensively examined and confirmed this «momentum effect». A portfolio based on this approach regularly reviews equities on the basis of fixed momentum rules. Complex fundamental analyzes are not necessary for this.

 

In three steps to a momentum strategy

The implementation of a momentum strategy takes three steps:

  1. Create a ranking list based on the strength of stock performance (Momentum)
  2. Selection of stocks with the strongest momentum
  3. Regular adjustment of the portfolio.

To measure the momentum of stocks, simple rules such as the return over the past 12 months already are a good start. However, successful momentum strategies are clearly more sophisticated. The rules should nevertheless not be too complex and applicable for different markets.

 

Simply invest in momentum stocks with the Dufour Capital certificate

Investors who do not wish to develop and operate their own momentum strategies can invest through the Dufour / UBS Certificate. The Dufour Stocks Momentum Certificate invests in stocks from the Stoxx 600 and SPI with the strongest momentum. The selection is purely rule-based - a maximum of 20 different titles are selected, thus much more concentrated than smart beta products but still diversified. The basis is a momentum model developed by Dufour Capital. The objective of the portfolio is an excess return compared to the Stoxx 600 and the SPI. This momentum strategy provides considerable added value, particularly in bulls and sideways markets. In a crisis, an additional, step-by-step rule-based risk reduction ensures that the cash share in the portfolio is increased. A full allocation in cash is possible so that the maximum losses are significantly reduced.

The graph shows how since the launch (Dec. 2015) a clear increase over the SPI and STOXX 600 was achieved.

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