The evidence suggests that we keep highly active exposures to value and momentum in their purest forms (assuming we are doing high-conviction non-watered down versions of the anomalies). Blending the strategy dilutes the benefit of value and momentum portfolios. The summary of the benefits of a pure value and a pure momentum approach can be summarized.
Overall, the evidence suggests that a blended strategy, which combines Value and Momentum into a single unified process, is worse than allocating 50% of your capital to a pure value investing fund, and 50% to a pure momentum investing fund. This may have implications for how investors allocate to value and momentum anomalies. Of course, one must consider that we have only analyzed simple value and simple momentum strategies. Perhaps there are more sophisticated techniques to make “blended” val/mom better than allocations to pure value and momentum. Some evidence from other authors finds conflicting evidence. We’ve done our own extensive testing reconciling the various findings, and we think the analysis above highlights in a SIMPLE way that combo portfolios are relatively better than blended portfolios. That said, we are open to additional input and testing from the broader research community.
Secular stock market cycles are extended periods of time when markets deliver below-average or above-average returns. Often lasting for one or two decades, secular bull and bear markets become an important backdrop to the overall market environment; although shorter term, “cyclical” bull and bear markets (that might last 1-3 years) can both occur within a broader secular bull or bear environment, the secular market serves as an overriding tailwind or headwind that further enhances or reduces market returns.
As it turns out, not only do these bull and bear secular market cycles occur with amazing consistency throughout history, but they also occur in a predictable manner: bear market cycles begin once markets reach historically high P/E ratios, and continue until markets reach historical lows, at which point a secular bull market begins, carrying the markets higher and higher until valuation once again reaches a historical peak, and the cycle begins anew. A visualization of secular market cycles over the past century from Crestmont Research is shown below.