GLOBAL PORTFOLIO

MOMENTUM AND VALUE INVESTING IN NON-CYCLICALS

In the November 2003 issue, it was concluded that the medical products sector is the leader on a global and long-term basis. Three different techniques were used in order to illustrate the advantages and disadvantages of each approach.

The market action of the past few months has produced a new leader over a three-year time frame: the consumer non cyclical market segment, which also includes some medical sectors. Let us look at this market segment again from three different angles.

The momentum approach identifies 10 stocks that show the best price momentum, by way of a risk return optimisation. It means that high momentum must be accompanied by low volatility as an indication of strong trend characteristics.

Laggards or stocks in clear downtrends can be avoided. The valuation is not taken into account, but can be added in the initial selection process. The pure value approach does not take into account trend or momentum, the idea being that the valuation gap against the average of the sector will be filled sooner or later.

A very successful approach is the combination of momentum and value. Becton Dickinson was the only stock that appeared on both lists. This stock was the second best performer of the momentum portfolio, while achieving a return almost double that of the sector index.

Some investors prefer a benchmarking approach, which basically tries to simply track the performance of the index (passive investing).