Is it the end of the dream run for momentum funds?

The momentum theme has recently captured significant attention. Many of our subscribers have been expressing growing interest in the investment case of momentum funds or Quant funds. While Quant funds are not strictly momentum funds, their behaviour makes them appear so. What are momentum funds? If you look at the oldest momentum index launched more than three years back - the Nifty 200 Momentum 30 TRI - its investment pool covers the 200 largest companies by market capitalisation. While, in theory, the larger companies grow slower, the momentum index has defied such conventions by outstripping even the small-cap index in the last one year - 68.9 per cent versus 63.5 per cent (as of February 29, 2024). Even if you check the Nifty 200 Momentum 30 TRI's returns since inception, the gap between the small-cap index isn't as yawning as one would expect—30.5 per cent versus 36.8 per cent returns (as of February 29, 2024). Generally, most fund managers would struggle to generate such alpha from investing in just the top 200 companies. But that's the power of momentum. How momentum funds pick stocks Universe of the top 200 stocks They find stocks that have grown in the past six