### Integrating Value and Momentum Stock Strategies, with Turnover Management

**May 9, 2016** - Momentum Investing, Strategic Allocation, Value Premium

Is there a most practical way to make value and momentum work together across stocks? In the April 2016 version of their paper entitled “Combining Value and Momentum”, Gregg Fisher, Ronnie Shah and Sheridan Titman examine long-only stock portfolios that seek exposure to both value and momentum while suppressing trading frictions. They define value as high book-to-market ratio based on book value lagged at least four months. They define momentum as return from 12 months ago to one month ago. They consider two strategies for integrating value and momentum:

- Each month, choose stocks with the highest simple average value and momentum percentile ranks. They suppress turnover with buy-sell ranges, either 90-70 or 95-65. For example, the 90-70 range adds stocks with ranks higher than 90 not already in the portfolio and sells stocks in the portfolio with ranks less than 70.
- After initially forming a value portfolio, each month buy stocks only when both value and momentum are favorable, and sell stocks only when both are unfavorable. This strategy weights value more than momentum, because momentum signals change more quickly than value signals. For this strategy, they each month calculate value and momentum scores for each stock as percentages of aggregate market capitalizations of other stocks with lower or equal value and momentum. They suppress turnover with a 90-70 or 95-65 buy-sell range, but the range applies only to the value score. There is a separate 50 threshold for momentum score, meaning that stocks bought (sold) must have momentum score above (below) 50.

They consider large-capitalization stocks (top 1000) and small-capitalization stocks (the rest) separately, with all portfolios value-weighted. They calculate turnover as the total amount bought or sold each month relative to portfolio size. They consider two levels of round-trip trading frictions based on historical bid-ask spreads and broker fees: high levels (based on 1993-1999 data) are 2.94% for small stocks and 1.06% for large stocks; low levels (based on 2000-2013 data) are 0.82% for small stocks and 0.41% large stocks. They focus on net Sharpe ratio as a performance metric. Using monthly data for a broad sample of U.S. common stocks during January 1974 through December 2013, *they find that:* Keep Reading