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The Wisdom of Herds

Following momentum's 2010 comeback, is there a role for the tactic in your portfolio?

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Despite ample evidence that momentum-based strategies can work, fundamentally focused investors can sometimes be dismissive of them. Facts can be stubborn, though. After taking a drubbing during the 2008 debacle and, in relative terms, 2009 as well, the strategy returned to historical form in 2010, with each of AQR's momentum-based indexes--U.S. Large Cap, U.S. Small Cap, and International--besting their relevant, market-cap-weighted counterparts by significant margins.

Launched in July 2009, moreover, the shop's AQR Momentum (AMOMX) delivered a strong first full calendar year, too, surpassing the large-growth category norm by more than 3 percentage points en route to a gain of 18.6%.

Rewards ...
Momentum gets a bad rap in part because it seems too easy. Rather than poring over a company's financials, assessing its executives, and constructing elaborate valuation models, momentum investors ask a single question--what's working now?--and invest accordingly. There are variations on the approach--some momentum strategies incorporate earnings data and relative strength among their criteria--but one remarkably simple tack has enjoyed remarkable success.

Shannon Zimmerman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.