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Momentum style gains respectability with superior returns

by Wayne Cheveldayoff, 2003-08-31

Among buy-and-hold investors and advisors, momentum-style investing is usually
labelled as risky, with warnings that it leads to nasty outcomes.

But the superior performance of the Synergy Canadian Momentum Class fund is giving the shunned style some respectability.

The equity fund has beaten both the S&P/TSX composite index and the average Canadian equity fund by a wide margin over the past five years and has earned a five-star rating from financial website

The fund was up 13.4 per cent in the year ended July 31, compared with 12.1 per cent for the index and 5.5 per cent for the average Canadian equity fund (as calculated by Fundata Canada Inc.). The Synergy fund’s better performance against the index is all the more impressive if one takes into account that it comes after deducting fees, as the Synergy fund has an annual 2.84 per cent management expense ratio (MER).

During the bear market of the past three years, the fund has outperformed the index (falling at an annual rate of 6.2 per cent versus a decline of 9.2 per cent for the index) although it did not perform as well as the average Canadian equity fund, which fell at an annual rate of 2.6 per cent during the period.

This points to the greater volatility of the momentum style of portfolio management, which is confirmed by the higher standard deviation for the Synergy fund compared with the average equity fund (5.3 vs. 4.1).

Over the past five years, however, the fund has topped both comparables, showing an average annual 7.7 per cent return, compared with 2.6 per cent for the index and 3.3 for the average of all Canadian equity funds.

Other funds, such as Dynamic Power Canadian Growth, AIM Canadian Premier and CI Landmark Canadian, are known to emphasize the momentum style in their overall approach.

But Synergy, which stakes its reputation on “pure style” investing, is the only Canadian fund company that has attached “momentum” to a fund name and that boasts that its momentum fund does nothing else.

In fact, the successful record of portfolio manager David Picton has been an essential ingredient in Synergy’s growth since the company was formed in 1997, as his momentum fund, at close to $500 million in assets, far exceeds the fund company’s growth, value and small cap funds combined and represents around 60 per cent of Synergy’s Canadian mutual fund assets.

The likely reason that the momentum style is usually left out of advisors’ recommendations is that it is often misunderstood. It is not simply about chasing stocks that are going up in price—at least not the way Picton approaches it.

Rather, the strategy involves looking for companies that are changing for the better and, furthermore, are showing earnings acceleration, upward changes in analysts’ earnings forecasts, positive earnings surprises, and strong relative strength (i.e., stock price is doing better than the market index).

It is a strategy that Picton adopted after years of quantitative analysis that focused on determining which style achieves the best performance in the Canadian equity market.

A key element to the momentum strategy is the willingness to pull the sell trigger at the first sign of trouble, on the assumption that any disappointment for a company is likely to be followed by more disappointments and bring a loss in share value.

This sell discipline is also an important factor in distinguishing the momentum style from the typical growth style of portfolio management. While a growth manager may regard an analyst downgrade or earnings miss as a temporary glitch on an upward trajectory and continue to hold on to the stock, a momentum manager is more likely to sell at the first hint of any trouble and then ask questions later.

One thing this leads to is a higher turnover in the portfolio, which would likely generate more capital gains in a year and a higher tax bill for those holding the momentum fund outside a registered plan (RRSP, RRIF or RESP).

Due in large part to the momentum fund’s success, Synergy Mutual Funds continued to attract investor funds during the bear market and its own growth performance recently attracted a suitor. When the takeover deal, announced in August, closes in October 2003, the Synergy funds will come under the much larger banner of CI Funds, which is approximately one-third owned by Sun Life.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. He can be contacted at

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©2003 Wayne Cheveldayoff