NEW YORK (Real Money) – I had a little free time this week, and so naturally I spent it testing numbers and theories of investing.
I have long been fascinated by the theory of Cliff Asness of AQR Management and a few others that combining growth-oriented momentum investing with a value approach inside a portfolio would outperform the overall market. It is a great theory, but a lot of the great theories deal with such large subsets of stocks they cannot be easily replicated in real life.
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Buying the top decile of momentum stocks and bottom decile of price-to-book-value stocks would involve more than 1,200 stocks. The growth and value ETFs (exchange-traded funds) contain far more than that just pure growth pure value, so they are not the best approach either.
I sorted through a bunch of mutual funds and chose two for my hand study. For growth I used the T. Rowe Price New Horizons Fund. With an average price-to-earnings ratio and a commitment to small-cap growth stocks, the fund looked like a good proxy for high-growth momentum stocks. The fund owns stocks like Netflix (NFLX) , Puma Biotechnology (PBYI) and Shutterstock (SSTK) that are high-growth, high-multiple stocks. It has beaten the market over the past decade and is a good proxy for the growth component of the portfolio.
The Undiscovered Managers Fund (UBVAX) is a top-performing value fund over the past decade and will be our value stand-in. The fund is managed by Fuller-Thaler research and is managed on value-oriented behavioral characteristics.
Once I selected my funds, I looked at what would happen if you combined them in a portfolio and rebalanced them. The mix does handily outperform the market over the past decade, with an 11.54% compared to the 8.07% average annual return of the S&P 500.