Capturing Alpha using Momentum Strategies in Sector Funds

Abstract
Momentum is a widely researched topic in academia and has been shown to be persistent throughout time and across various asset classes. In this paper, we use industry focused mutual funds and indexes to study momentum. We found a consistent and statistically significant alpha generation in momentum-based portfolio using industry-focused mutual funds. To separate the performance attributed to momentum phenomenon from managerial skills, we also study momentum-based portfolio performance using passive indexes, based on industrial classification. We report annualized excess returns of 3.29% for industry focused mutual funds and 3.91% for industry-based passive indexes, over S&P 500 Index.

Capturing Alpha using Momentum Strategies in Sector Funds

Investment using momentum strategies require that investors invest in securities or portfolios that have outperformed the rest of the stock universe based on short-term historical performance. In a way, it is contrarian view to the famous investment philosophy Buy Low Sell high because momentum says Buy High Sell higher. The expectations of the investor are that the investments superior prior performance will continue into the future causing the investment to earn an abnormally high risk-adjusted return. There has been extensive research on individual stocks momentum and their ability to generate abnormal stock returns. In simple terms, momentum strategy comprises of buying past winners and selling past losers. Jegadeesh and Titman (1993) studied intermediate term correlation in the 1965-89 periods and uncovered a momentum effect for 3 to12-month holding periods. They found that stock selections based on 6-month stock performance and holding the portfolio for the following 6 months realized annualized abnormal returns of about 12%. In 1999, Chan, Jegadeesh and Lakonishok (1996) discovered a similar price momentum in the 1973-93 and 1994-98 (out-of-sample) periods. During the same period, Schierek, De Bondt and Weber (1999) found that stocks on the Frankfurt Stock Exchange also exhibit intermediate-term momentum. There has been various studies performed on other asset classes and various global capital markets. Rouwenhorst(1998) showed the presence of momentum returns in International equity markets using data from 1980-1995. Asness, Liew and Stevens (1997) studied the influence of Momentum along with Book-to-Market ratio, market equity on cross-section of expected individual stocks returns within US and other countries. Okunev and White(2003) examined momentum trading strategies in foreign exchange markets throughout 1980s and 1990s. Finally, a comprehensive study by Asness, Moskowitz and Pedersen(2008) supported the presence of momentum-based excess returns in global equity and fixed-income markets, currencies and commodities. Various explanations and hypothesis have been 2

proposed to explain the presence of abnormal returns by momentum strategies. Daniel, Hirshleifer and Subramanyam(1998, 2001) proposed that investor overconfidence and biased self-attribution are two major reasons for Market Under- and Overreactions, especially self-attribution causes positive short-lag autocorrelation which is momentum phenomenon. Similarly, Barberis, Shleifer and Vishny(1998) provided a parsimonious model of investment sentiment causing underreaction and overreaction in stock prices. Moskowitz and Grinblatt (1999) made two major classifications of theories to explain momentum behavioral and rational. Their studies showed that individual stock momentum is substantially explained by industry momentum. Grinblatt and Han(2005) proposed prospect theory and mental accounting responsible for momentum phenomenon. The study also showed that past returns have no predictability for the cross-section of returns once a variable proxying for aggregate unrealized capital gains is controlled (mental accounting theory). ONeal(2000) shows that the strategy of buying previous intermediate-term top-performing sector funds outperformed S&P500 Index over the 10-year period from May 1989 through April 1999 on a totalreturn basis. This paper explores the persistence of momentum phenomenon and the presence of superior risk-adjusted return of momentum-based portfolios. This paper offers out-of-sample testing of the hypothesis testing, that buying winner and selling losers offer abnormal returns in a consistent manner. Eakins and Stansell (2004) reports that momentum strategies outperformed benchmarks according to the Sharpe Ratio. They also reported that a short look-back, a time-period used for performance ranking, period provided a better risk profile. They also noted that by dropping an Internet sector out of studies most combinations of look-back and holding period of momentum strategies underperformed. Moskowitz and Grinblatt used the CRSP data base to for industry based market-value portfolios. They showed that individual stock momentum strategies generate large returns because of the profitability of industry momentum strategies. They also showed that industry momentum is present after controlling for size (measured by market capitalization) and Book Equity/Market Equity (book-to-price ratio) factors. 3

The current paper uses Fidelity Select Mutual Funds to verify if momentum strategies and its abnormal profits were the result of data-mining or a temporary market phenomenon or a persistent market anomaly which could be exploited for abnormal profits. We carry out our analysis using investable vehicle, mutual funds, using time-period of 1995-2010, which involved different equity regimes, i.e. 3bull (1996-1999, 2002-2006, 2009-2010) and 2-bear (2000-2001, 2008-2009) cycle as well as time period with high-volatility and low-volatility markets, to provide robust results of our strategy performance. This paper is organized as follows. Section I discusses the data and methodology, along with characteristics of the mutual funds and indexes used in this study. Section II explores the presence of the momentum phenomenon in the Fidelity Select Mutual Funds series, and motivates the further study of exploring industries momentum phenomenon using passive indexes. Section III analyzes interplay of momentum phenomenon and active management, including analysis of passively managed industry indexes from the Dow Jones, during the same time period. Section IV examines the effect of economic cycles on momentum and Section V examines duration of the momentum and value effect. Section VI summarizes the conclusion. I. Data and Methodology

a. Sector Mutual Funds We used 33 mutual funds of Fidelity Select series, including money-market funds, to explore any momentum phenomenon present in mutual funds focusing on specific sectors1. Fidelity Sector mutual funds are widely used in investment management industry, and they offer a wide variety of sector mutual funds. As mentioned in Neal(2000), there are two advantages of using Sector mutual funds as opposed to using individual stocks that fall under a specific official classification sector. First, transaction costs for mutual funds are precisely known2. Second sector mutual funds allow the investors to adopt manageable investment vehicles. It is more difficult for investors to obtain a large number of equity stocks within a particular industry/sector. Due to these reasons, the results of this study have direct implications and 4

practical applications for the investment management industries and for a wide range of investors including the sophisticated investor and the individual investor. We use monthly price returns from December 31, 1994 to December 31, 2010 for 40 funds from Fidelity Select sector funds. Some of the funds do not have data before 1995 and were eliminated from the study. In final analysis, we included 33 funds with data starting from December 1994 until December 2010. These data were acquired using the Bloomberg Professional system. b. Sector Indexes The primary disadvantage of using mutual funds is they are usually actively managed, which implies that mutual funds are not purely diversified portfolios. In other words, an analysis of the momentum phenomenon using mutual funds is affected by a managers stock-picking skills. To address this possibility, we used passively-managed industry focused indexes3. For the passive-managed index, we used monthly returns for 37 global sector indexes published by the Dow Jones, from December 31, 1994 to December 31, 2010. These indexes are price return indexes and free-float market weighted. c. Performance Benchmark Two benchmarks over the same time period are used to compare the risk and returns of the momentum strategies using mutual funds and passive indexes3. First, the S&P 500 Index, the standard industry benchmark, is used. To be consistent with our treatment of mutual funds and indexes, the pricereturn index which does not consider the reinvestment of dividends is used. Although, the average security market capitalization in the mutual funds approximates a large capitalization firm making the S&P500 a reasonable benchmark, mutual funds frequently have substantial positions in mid capitalization and small capitalization stocks. To avoid this bias, the S&P 1500 composite, which combines S&P 500 (Large Capitalization), S&P 400 (Mid Capitalization) and S&P 600 (Small Capitalization) indexes is used also. The risk-free rate/cash returns are estimated by the 3-Month Treasury bill yield. 5

d. Methodology Portfolio Construction The momentum phenomenon is examined by using 11 months to rank the funds and a one month holding period. Following is the detailed procedure used to explore the momentum phenomenon: Monthly returns for each individual sector fund are calculated December 31, 1994 to November 30, 1995. The total returns for each of the 33 sector mutual funds are sorted in descending order. The top 11 mutual funds were used to create a Winner portfolio, consist of equal-weighted Winner sector mutual funds. The last 11 funds in descending order were used to create a Loser portfolio, again with equal-weighted Loser sector mutual funds. The remaining 11 funds that fall in between Winner and Loser ranking, are used to create an equal-weighted Middle portfolio. A zero cost, self-financing portfolio with zero risk consisting of Winners minus Losers (WML) is also created. Total returns for the momentum-based portfolios are calculated by compounding monthly returns, to account for the variability in returns, whereas total returns for benchmarks are holding period returns. The reason behind the difference of treatment is to compare portfolio results versus benchmark buy-and-hold strategy. All the portfolios are held for one month and then ranked and rebalanced again, based on their previous 11 months performance. For example, on January 1, 1996, funds are ranked based upon their performance during February 1995 December 1995. Notice, that 10 months considered for ranking are same as used earlier. In other words, overlapping returns are used for ranking purpose, with only one month added for the first time. In addition to Winner and Loser portfolios, the ranking position of each fund is noted.

II. Momentum and Active Industry Mutual Funds 6

First, the total holding period return is examined. Table 1 indicates the dollar value if $100 was invested in each of the four portfolios on December 1, 1995and the portfolio strategy followed until December 31, 2010. The WML Portfolio with a return of $300.25 clearly outperforms of the other portfolios followed by the Winner Portfolio with $259.19, the SP1500 with $221.71., the SP500 with $207.75, the Middle Portfolio with $102.03 and lastly the Loser Portfolio with $58.90.

Table.I Descriptive Statistics of Momentum-based portfolios and Benchmark Indexes

Average Monthly Return S&P500 S&P1500 Winner Middle Loser WML 0.394% 0.431% 0.758% 0.228% -0.017% 0.776% Monthly Standard Deviation 4.790% 4.810% 5.730% 5.290% 6.590% 5.730% Sharpe Ratio 0.0265 0.0339 0.0756 -0.0127 -0.0476 0.0821 Maximum Drawdown 56.87% 54.72% 59.33% 61.54% 78.47% 43.44% Best Month 9.2% 9.6% 16.4% 15.5% 17.2% 23.8% Worst Month -18.6% -19.2% -22.0% -24.0% -22.1% -15.1% MAD 3.64% 3.67% 4.43% 3.98% 5.00% 4.11% Positive Months 110 109 107 100 96 106 Negative Months 60 71 73 80 84 74 %Pos 64.7% 60.6% 59.4% 55.6% 53.3% 58.9% %Neg 35.3% 39.4% 40.6% 44.4% 46.7% 41.1%

From the results above, it is clear that Winner and WML portfolio has better risk-return characteristics, while their Sharpe ratio is compared against their benchmarks, nonetheless both Winner and WML portfolio exhibit higher volatility of returns then their benchmarks. Interestingly, Loser Portfolio has even 7

higher volatility of returns on a monthly basis. The results show that volatility of all four momentumbased portfolios are higher than benchmarks. The WML had the highest Shape ratio of 0.0821 followed by the Winner portfolio with a ratio of 0.0756. Both these portfolios have better risk-return characteristics than the S&P500 (Sharpe ratio = 0.0265) and S&P1500 (Sharpe ratio = 0.0339). The maximum drawdown explains the downside that a portfolio has experienced from its peak. It is clear that from 1995-2010, performance drawdown would be present during 2007-2009 economic turmoil for this research. The Winner, Middle and Loser portfolios all had higher drawdown compared to the benchmarks, but the WML portfolio had the smallest drawdown of only 43.44%, and it is attributed to the short positions in the WML portfolio acting as a hedge during downturn of 2007-2009. Higher % of months with Positive returns of SP500 and SP1500 is consistent with higher volatility exhibited by Momentum portfolios. Figure 2 represent the dollar returns that an investor would have realized if a portfolio consisted of corresponding ranked fund for every $ 100 invested on December 1, 1995. For example, if an investor had invested 100% of her funds into the second ranked fund, with a monthly rebalancing, the investor would have accrued $292.25 on December 31, 2010. Please note that fourth ranked fund seemed to be an outlier. Our detailed analysis of Winner funds on rank 4 revealed that this extra-ordinary performance of rank 4 is clearly by chance, i.e. it is not driven by any particular fund during any time period. Obviously, there is no theoretical rationale backing the superior performance of any particular ranked fund.

Regression Results of Momentum-based portfolio The one-factor model is used to explore the alpha of momentum investing. Regression analysis with the momentum-based portfolio excess returns as the independent variable and the benchmark returns as the independent variable are estimated. Specifically,

where, rate,

represents, monthly time series momentum-based portfolio returns excess the risk-free is risk-free 3 month treasury bill yield, is

represents monthly time-series of index returns,

standard error of regression.

Table. II Regression results of Momentum-based Portfolios (CAPM Model)

SP500 Index as benchmark

Portfolio Winner Middle Loser WML Alpha 0.590%
2.13 (0.035)

Beta 0.9294
16.13 (0.000)

p-value 0.0000 0.0000 0.0000 0.0067

Std. Error 0.0014 0.0005 0.0012 0.0032

IR 0.0833 -0.0851 -0.1218 0.0421

0.592 0.820 0.721 0.040

0.070%
-0.75 (0.450)

1.0036
21.51 (0.000)

-0.200%
0.43 (0.667)

1.1708
28.60 (0.000)

0.780%
1.86 (0.065)

-0.2414
-2.74 (0.000)

SP1500 Index as benchmark

Portfolio Winner Alpha 0.550%
2.08 (0.040)

Beta 0.9491
17.24 (0.000)

p-value 0.0000

Std. Error 0.0013

IR 0.0945

0.624

Middle

0.030%
-0.94 (0.351)

1.0118
22.06 (0.000)

0.842

0.0000

0.0004

-0.0963

Loser

-0.240%
0.22 (0.825)

1.1729
30.93 (0.000)

0.731

0.000

0.0012

-0.1270

WML

0.780%
1.87 (0.063)

-0.2238
-2.55 (0.0117)

0.035

0.0114

0.0032

0.0424

The results in Table 2 indicate that the WML portfolio successfully captured 0.78% alpha per month, and the Winner portfolio captured 0.59% alpha per month. Alpha generated by WML and Winner portfolios are statistically significant 10% and 5% level, respectively. Interestingly, they exhibit better risk-return profile and higher alpha with lower beta (negative beta in case of WML) compared to other momentumbased portfolios. Information ratio is a measure of risk-adjusted return and is calculated by expected active return divided by tracking error and is used to measure the skills of managers. Both, Winner and WML portfolios have high positive information ratio indicating their superior risk-adjusted performance. Similar results are obtained using the SP1500 index as benchmark. 10

III: Momentum or Active Managerial Skills

One counter-argument that could be made against the results above which imply the presence of positive alpha in momentum-based portfolios is that these alphas could be a result of managerial skills (i.e. stock picking skills of mutual fund manager). We take three different approaches to test the hypothesis that these alphas are substantially, if not completely attributed to momentum: (A) distribution analysis, (B) regression analysis, and (C) passivemanaged index based momentum portfolios. III. A: Distribution Analysis First, consider the frequency distribution of individual funds among all portfolios. That is observing how many of times a particular fund was allocated to the Winner, Middle and Loser portfolios. If the results of momentum-based portfolios are driven by managerial skills, then the frequency distribution in the Winner portfolio would be skewed towards those funds with skilled managers. Figure 3 shows the frequency distribution of each fund in the Winner, Middle and Loser portfolios. Visual inspection reveals that the distributions are fairly uniform among all 33 mutual funds. This result rejects the idea that only a few funds ran by skilled managers are generating the alphas in the momentum-based portfolios in this study.

11

III. B: One-Factor CAPM and Two-Factor Momentum based Regression Regression analysis is used to further explore the relationship between managerial skills and momentumbased portfolio alpha. This time the dependent variable is monthly time-series returns for all 33 mutual funds and the independent variable is the monthly returns on the S&P500 or S&P1500. Average alpha of 33 mutual funds, is 0.153% per month against SP500 and 0.114% per month against SP1500 as benchmark with 10% significance level. By comparing this 0.153% alpha per month with 0.590% alpha per month of Winner portfolio, it is clear that momentum-based portfolio generated alpha is not attributed (at least not completely), to mutual fund manager skills. The complete results of individual mutual fund regressions are presented in appendix. Table. III One-Factor CAPM Regression results of Individual Mutual Funds (CAPM Model) Benchmark SP500 SP1500 Alpha 0.153%
0.41 (0.551)

Beta 1.035
13.70 (0.000)

R2 0.474 0.486

p-value 0.0000 0.000

Std. Error 0.003 0.003

0.114%
0.31 (0.568)

1.045
14.09 (0.000)

12

To further examine the source of alpha, the moving average return for the past 11-months is included as a second independent variable in the regression model. The results found the alpha of 0.023%, and coefficient for risk premium is 0.99 with coefficient for momentum factor is 0.437 against benchmark SP500 Index. This alpha is significant at 10% significance level whereas coefficient for momentum is significant at 5% level. Similar results are obtained by using SP1500 index as benchmark. These factor models show that most of the alpha generated by mutual funds under the one-Factor model is attributed to Momentum. It is still clear that the earlier results (presented in Table II.) of alpha from Momentumbased portfolios are not because of active managerial skills. Table. IV Two-Factor Regression results of Individual Mutual Funds Benchmark SP500 SP1500 Alpha 0.023%
0.09 (0.741)

Beta 0.989
12.84 (0.000)

Momentum 0.437
2.58 (0.050)

R2 0.512 0.524

p-value 0.0000 0.0000

Std. Error 0.003 0.003

0.000%
-0.00 (0.739)

1.000
13.21 (0.000)

0.426
2.55 (0.053)

III.

C. Momentum and Passively managed Indexes

In this section, we try to compare the results of momentum-based portfolio and its alpha, this time using passively managed indexes. As mentioned in Data and Methodology, we use 37 Dow Jones Global Indexes series as sector indexes. The same portfolio construction and ranking methodology developed previously were used. Figure 4 provides the NPV results of depositing $100 on December 1, 1995. Once again, the WML Portfolio outperforms its peer, by returning $319.76 for every $100 invested, followed by the Winner Portfolio which returned$307.65, SP 1500 returning $221.71, and the SP 500 returning $207.75. In agreement with the mutual fund portfolio results, the Middle Portfolio and Loser portfolio underperformed their benchmarks with returning $119.37 and $87.89 only. Interestingly, momentumbased portfolio using passively managed indexes outperforms momentum-based portfolios using actively

13

managed mutual funds Winner Portfolio using passive indexes returns $307.65 compared to Winner Portfolio using Active mutual funds which returns$259.19.

The individual rank-based portfolio performance was studied, and results are shows in Figure 5. It is evident that higher ranked portfolios (1-11) tend to outperform lower-ranked (12-33) portfolios. It is shown that $100 invested in, only 3rd ranked fund, with monthly rebalancing, would have returned $344.44 on 31st Dec, 2010. Once again we see a portfolio made using Rank 7 is an outlier (same as Rank 4 in case of Active mutual fund).

14

IV. Following Momentum (and Value) The results in this paper have shown a significant momentum effect present in sector mutual funds and passive sector indices. We now explore how long the momentum effects last, in other words, how long does Winner stays winner and how long does Loser take to become winner. Figure 6 shows the relationship between the average realized monthly returns and number of months following the ranking period for all three portfolios, namely Winning, Middle and Loser portfolio. The results indicate a sharply decreasing pattern of average monthly returns as the follow-up period increases. It suggests that the, momentum effect fades away very quickly. This justifies a short holding period of momentum-based portfolio after ranking.

15

Over the three years following the ranking, the Winner portfolio has almost 0% per month average returns. A similar pattern for Winner portfolio is observed using Dow Jones indexes as demonstrated in Figure 7. Interestingly, it also shows that after a holding period of 3 years, the Winners, Middle and Loser portfolios return similar returns of about 0.15% average monthly.

16

These results support the hypothesis that value stocks tend to outperform growth in long-term. Empirically researchers have shown that value stocks have outperformed the equity market in general, (Fama and French (1998) and Lakonishok, Shleifer and Vishny (1994)). Asness (1997) has done an exceptional job in explaining the interaction between value and momentum. Our results support the negative correlations among value and momentum stocks as well as ability to delivery excess returns by both value and momentum stocks, although over the different time horizon.

V. Economic Rationale, Proposed Theories & Practical Application Various theories have been proposed by other researchers, to explain the persistence of momentum in various asset classes as well as in global financial market. The results indicate, that alpha is

significantly explained by momentum-factor, not by individual stock selections.

17

We document the presence of hot and cold sector of the economy through various economic cycles in Appendix II. For instance, Winner Portfolio during 1995-1999 is dominated by technology stocks, whereas Gold fund became part of Winner Portfolio during 2007-2009 economic crisis as safe harbor, similarly Banking and Financial Services fund were part of Loser Portfolio during the same time period. Of course, the real strength of momentum-based strategy lies in picking Winner early. In this sense, the industry momentum strategy is supposed to work better than individual stock momentum. Predicting hot and cold industries based on macroeconomic variables is more powerful than picking individual stocks winners. Industry momentum-based portfolios tend to diversify idiosyncratic risk of individual stocks and have better drawdown profiles compared individual stocks momentum portfolio. Sector rotation has been a common practice in fixed-income investing for long period of time. The results of this study suggest a consistent presence of the momentum phenomenon across industries throughout various economic cycles. Empirical support using mutual funds provides further evidence that momentum is not only a topic of academic interest, but also an implementable strategy to earn superior risk-adjusted returns. Further analysis using passively managed indexes to create momentum-based portfolios helps investors to overcome a problem of illiquidity, high transaction costs and expense ratios and still earning superior returns. VI. Conclusion This research has two major findings. First, momentum-based portfolios generated superior risk-adjusted returns using industry-focused mutual funds or passive indexes. Second, only a negligible portion of the total alpha created is attributed to managerial skills. Future research can be focused using extensive Fama-French-Carhart Factor model and by incorporating a proxy of P/B and Market Value factors into the models. There is no theoretical rationale behind using equal-weighting scheme for portfolio construction. An alternative weighting scheme could also be explored. For example, ranking-based weight where Rank 1 fund is allocated a higher weight in Winner portfolio than Rank 24 may provide 18

interesting results. A further research avenue is to find the optimal number of funds to include in a momentum portfolio, to reduce turnover and transaction costs. We focused our studies on direct investment vehicles, compared to large number of individual securities. The results of this study have direct application in practitioners world. One sentence explanation is needed Notes
1, Please note in this paper, Sector refers to the classification used by Mutual fund manager, that is Fidelity and has no relation with any other official classification system. Also, in this paper Sector and Industry are used interchangeably. 2, We do not use transaction costs or mutual fund managers fees (i.e. Expense ratio) in our analysis. Since transaction costs and management expenses vary according to investors preferences and holding period; we focus our studies on gross results. 3, Using price history of ETFs that track industry-focused indexes would be a better approach, but due to lack of enough history of ETFs, we used passive indexes. We believe due to low-tracking error between ETFs and passive indexes, our results remain applicable to ETFs to replicate the strategy without any significant loss of performance. Perhaps, the result of this study will motivate ETFs sponsors to design more passive products based on sector indexes and momentum-based indexes (One example of Momentum-based index is AQR Momentum Index). 4, Our focus on this paper is to study the results of momentum phenomenon with practical implications. Thus, instead of using CRSP Value-Weighted portfolio as benchmark, we chose to use SP500 and SP1500, which are widely used proxy market index. 5, Of course, it assumes the availability of investable products like ETFs on those passively managed indexes.

References: Asness, C., Liew, J., Stevens, R., Parallels Between the Cross-sectional Predictability of Stock and Country Returns, The Journal of Portfolio Management, vol. 23, no. 3, 79-97, Spring 1997. Asness, C.S., Moskowitz, T.J., Pedersen, L.H., Value and Momentum Everywhere, AFA 2010 Atlanta Meetings Paper Working Paper Series, Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1363476 Asness, C.S., The Interaction of Value and Momentum Strategies, Financial Analysts Journal, vol. 53, no.2, March/April 1997. Barberis, N., Shleifer, A., Vishny, R., A Model of Investor Sentiment, Journal of Financial Economics, vol. 49, no.3, Sept. 1998. Chan, K.C., Jegadessh, N., Lakonishok, J. Momentum Strategies The Journal of Finance, vol.51, no.5, Dec 1996 Daniel, K. D., D. Hirshleifer, and A. Subrahmanyam, Investor psychology and security market under- and over-reactions, The Journal of Finance, vol. 53, no. 6, Dec. 1998. 19

Eakins, S.G., Stansell, S.R. Do Momentum Strategies Work? The Journal of Investing, vol.13, no. 3, Fall 2004 Fama, E.F., French, K.R., Value versus Growth: The International Evidence, The Journal of Finance, vol 53, no. 6, Dec. 1998. Grinblatt, M., Han. B.. Prospect Theory, Mental Accounting, and Momentum. Journal of Financial Economics, vol. 78, no.2, Nov. 2005. Jegadeesh, N., and Titman, S., 1993, "Returns to buying winners and selling losers: Implications for stock market efficiency", Journal of Finance, vol. 48, no.2, 65-91 Lakonishok, J., Shleifer, A., Vishny, R., Contrarian investment, extrapolation, and risk, Journal of Finance, vol. 49, no. 5, 1994. Moskowitz, T.J., Grinblatt, M., Do Industries Explain Momentum? The Journal of Finance, vol. 54, no. 4, August 1999 ONeal, E.S. Industry Momentum and Sector Mutual Funds. Financial Analysts Journal, vol. 56, no. 4, July/August 2000. Okunev, J., and D. White, Do momentum-based strategies still work in foreign currency markets? Journal of Financial and Quantitative Analysis, vol. 38, no.2, 2003. Rouwenhorst, K., International Momentum Strategies, Journal of Finance, vol. 53, no.1, 267-284, 1998. Schiereck, D., De Bondt, W., Weber, M., Contrarian and Momentum Strategies in Germany, Financial Analysts Journal, vol. 55, no. 6, Nov./Dec. 1999.

Appendix
Appendix I. Fidelity Select Mutual Funds All the following funds do not have Entry or Exit Load. Maximum redemption Fee & Early Withdrawal penalty is 0.75%.
No. Name %Expense Ratio %Turnover Mean Monthly Return 0.65% 0.76% Std Deviation 7.15% 8.39%

1 2

Select Air Transportation Portfolio (FSAIX) Select Automotive Portfolio (FSAVX)

0.91 0.91

161 91

20

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

Select Banking Portfolio (FSRBX) Select Biotechnology Portfolio (FBIOX) Select Brokerage and Investment Mgt Portfolio (FSLBX) Select Chemicals Portfolio (FSCHX) Select Communications Equipment Portfolio (FSDCX) Select Computers Portfolio (FDCPX) Select Construction and Housing Portfolio (FSHOX) Select Consumer Discretionary Portfolio (FSCPX) Select Consumer Finance Portfolio (FSVLX) Select Consumer Staples Portfolio (FDFAX) Select Defense and Aerospace Portfolio (FSDAX) Select Electronics Portfolio (FSELX) Select Energy Portfolio (FSENX) Select Energy Service Portfolio (FSESX) Select Environment and Alternative Energy Portfolio (FSLEX) Select Financial Services Portfolio (FIDSX) Select Gold Portfolio (FSAGX) Select Health Care Portfolio (FSPHX) Select Industrial Equipment Portfolio (FSCGX) Select Insurance Portfolio (FSPCX) Select Leisure Portfolio (FDLSX) Select Materials Portfolio (FSDPX) Select Medical Delivery Portfolio (FSHCX) Select Multimedia Portfolio (FBMPX) Select Natural Gas Portfolio (FSNGX) Select Retailing Portfolio (FSRPX) Select Software and Computer Services Portfolio (FSCSX) Select Technology Portfolio (FSPTX) Select Telecommunications Portfolio (FSTCX) Select Transportation Portfolio (FSRFX) Select Utilities Portfolio (FSUTX)

0.88 0.86 0.86 0.89 0.9 0.88 0.98 0.95 0.98 0.86 0.88 0.86 0.85 0.85 1.07 0.88 0.89 0.82 0.88 0.91 0.89 2.1 0.88 0.94 0.88 0.93 0.83 0.83 0.91 0.9 0.87

73 119 153 108 85 141 101 196 161 57 43 101 107 85 190 242 35 99 82 193 112 87 55 76 167 191 189 136 72 114 238

0.10% 0.78% 0.85% 0.69% 0.60% 0.63% 0.52% 0.30% -0.36% 0.37% 0.72% 0.82% 0.86% 1.49% 0.35% 0.18% 1.06% 0.24% 0.38% 0.50% 0.52% 0.74% 0.52% 0.42% 0.93% 0.57% 0.85% 0.76% 0.29% 0.69% 0.20%

6.80% 8.23% 7.39% 6.04% 10.07% 10.11% 6.52% 5.10% 6.41% 3.94% 5.64% 10.97% 7.19% 10.49% 5.65% 6.29% 10.79% 4.69% 6.53% 5.90% 5.80% 6.54% 6.28% 6.33% 7.79% 6.19% 9.21% 10.07% 7.52% 6.00% 4.97%

Appendix II. Individual Mutual Fund regression results One-Factor CAPM II. A. One-Factor CAPM Regression results against SP500 Index
No. 1 2 3 4 5 Alpha 0.242% 0.229% -0.270% 0.342% 0.382% Beta 1.035 1.322 0.965 0.781 1.373 R2 0.433 0.571 0.415 0.206 0.748 F-Stats 145.78 254.06 135.77 49.64 568.09 p-value 0.000 0.000 0.000 0.000 0.000 Error 0.003 0.003 0.003 0.005 0.001

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6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 Mean

0.381% -0.136% -0.107% 0.175% 0.051% -0.692% 0.224% 0.432% -0.031% 0.467% 0.745% 0.063% -0.164% 0.415% 0.045% -0.002% 0.198% 0.213% 0.378% 0.226% 0.067% 0.502% 0.244% 0.230% 0.023% -0.176% 0.375% -0.028% 0.153%

0.893 1.550 1.528 0.979 0.882 0.862 0.497 0.903 1.712 0.903 1.254 0.875 1.088 0.565 0.621 1.177 0.903 1.007 1.009 0.635 1.110 0.859 0.935 1.370 1.611 1.262 0.926 0.752 1.035

0.490 0.503 0.471 0.500 0.649 0.363 0.341 0.540 0.512 0.345 0.307 0.510 0.638 0.063 0.372 0.692 0.514 0.657 0.507 0.215 0.679 0.264 0.505 0.485 0.557 0.604 0.521 0.495 0.475

183.22 193.57 170.21 190.85 353.92 108.71 98.69 223.96 200.32 100.43 84.79 198.99 337.05 12.81 113.07 429.48 202.02 366.20 196.39 52.21 404.38 68.62 194.70 179.96 240.33 291.54 207.41 187.11 204.37

0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

0.002 0.005 0.006 0.002 0.001 0.003 0.001 0.001 0.006 0.003 0.008 0.002 0.001 0.010 0.001 0.001 0.002 0.001 0.002 0.003 0.001 0.004 0.002 0.004 0.004 0.002 0.002 0.001 0.003

II. B. One-Factor CAPM Regression results against SP1500 Index

No. 1 2 3 4 5 6 7

Alpha 0.203% 0.178% -0.303% 0.311% 0.334% 0.348% -0.193%

Beta 1.044 1.340 0.959 0.799 1.370 0.902 1.557

R2 0.445 0.592 0.414 0.218 0.753 0.505 0.513

F-Stats 153.31 277.55 135.13 53.37 581.93 194.48 201.02

P-Value 0.000 0.000 0.000 0.000 0.000 0.000 0.000

Error 0.003 0.003 0.003 0.005 0.001 0.002 0.005

22

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 Mean

-0.162% 0.136% 0.019% -0.724% 0.207% 0.398% -0.094% 0.431% 0.693% 0.028% -0.202% 0.388% 0.024% -0.046% 0.166% 0.176% 0.339% 0.199% 0.026% 0.466% 0.209% 0.180% -0.036% -0.220% 0.341% -0.053% 0.114%

1.531 0.999 0.886 0.866 0.493 0.916 1.725 0.923 1.297 0.896 1.081 0.608 0.614 1.189 0.900 1.014 1.024 0.662 1.118 0.891 0.945 1.372 1.620 1.256 0.933 0.740 1.045

0.478 0.526 0.663 0.369 0.339 0.561 0.525 0.364 0.333 0.541 0.637 0.074 0.367 0.713 0.515 0.673 0.528 0.236 0.695 0.287 0.520 0.491 0.570 0.605 0.533 0.483 0.487

174.66 211.56 375.15 111.86 97.78 243.70 211.26 109.20 95.19 225.26 334.99 15.16 110.73 475.62 202.75 393.20 213.63 58.99 435.98 76.87 206.93 184.59 252.73 292.23 218.35 178.30 215.26

0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

0.006 0.002 0.001 0.003 0.001 0.001 0.006 0.003 0.007 0.001 0.001 0.010 0.001 0.001 0.002 0.001 0.002 0.003 0.001 0.004 0.002 0.004 0.004 0.002 0.002 0.001 0.003

Appendix III. Individual Mutual Fund regression results Two-Factor Regression III. A. Two-Factor Regression results against SP500 Index
No. 1 2 3 4 5 6 7 8 Alpha 0.064% 0.160% -0.208% -0.061% 0.310% 0.207% -0.131% -0.136% Beta 0.982 1.288 0.908 0.696 1.352 0.871 1.447 1.446 Mom 0.406 0.239 0.572 0.859 0.132 0.403 0.407 0.347 R2 0.478 0.583 0.463 0.266 0.764 0.515 0.537 0.500 F-Stats 82.01 125.30 77.09 32.47 290.08 94.90 103.61 89.44 P-Value 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Error 0.003 0.003 0.003 0.005 0.001 0.002 0.005 0.006

23

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 Mean

0.015% 0.017% -0.356% 0.042% 0.179% -0.084% 0.182% 0.217% -0.021% -0.170% -0.133% -0.008% -0.028% 0.073% 0.157% 0.224% -0.049% 0.031% 0.150% 0.153% 0.074% -0.042% -0.167% 0.187% -0.071% 0.023%

0.937 0.858 0.794 0.477 0.865 1.646 0.861 1.200 0.847 1.057 0.502 0.585 1.149 0.863 0.983 0.985 0.616 1.082 0.819 0.896 1.302 1.539 1.213 0.896 0.690 0.989

0.543 0.192 0.673 0.572 0.436 0.276 0.568 0.651 0.516 0.251 1.192 0.381 0.249 0.375 0.180 0.335 0.861 0.178 0.588 0.276 0.367 0.300 0.223 0.407 0.480 0.437

0.534 0.673 0.470 0.392 0.583 0.541 0.383 0.353 0.552 0.670 0.139 0.402 0.722 0.544 0.677 0.537 0.319 0.701 0.305 0.524 0.506 0.580 0.619 0.550 0.542 0.513

102.40 184.59 79.37 57.75 125.31 105.52 55.51 48.92 110.20 181.76 14.51 60.20 232.06 106.71 187.39 103.81 41.88 209.39 39.21 98.53 91.50 123.37 145.69 109.36 106.03 109.57

0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

0.002 0.001 0.002 0.001 0.001 0.006 0.003 0.007 0.001 0.001 0.010 0.001 0.001 0.002 0.001 0.002 0.003 0.001 0.004 0.002 0.004 0.004 0.002 0.002 0.001 0.003

III. B. Two-Factor Regression results against SP1500 Index

No. 1 2 3 4 5 6 7 8 9 10 Alpha 0.033% 0.117% -0.239% -0.079% 0.262% 0.186% -0.184% -0.188% -0.015% -0.014% Beta 0.993 1.309 0.903 0.714 1.349 0.880 1.455 1.451 0.958 0.863 Mom 0.392 0.216 0.578 0.838 0.131 0.376 0.400 0.341 0.520 0.193 R2 0.490 0.604 0.463 0.276 0.769 0.528 0.545 0.506 0.558 0.687 F-Stats 86.15 136.54 77.03 34.07 297.90 100.10 107.41 91.78 112.96 196.76 P-Value 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Error 0.003 0.003 0.003 0.005 0.001 0.002 0.005 0.005 0.002 0.001

24

11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 Mean

-0.387% 0.026% 0.159% -0.142% 0.157% 0.184% -0.050% -0.207% -0.148% -0.029% -0.068% 0.044% 0.122% 0.199% -0.069% -0.006% 0.127% 0.119% 0.030% -0.096% -0.210% 0.162% -0.095% -0.009%

0.797 0.473 0.880 1.664 0.881 1.243 0.869 1.051 0.539 0.578 1.163 0.860 0.991 1.002 0.639 1.092 0.850 0.906 1.306 1.552 1.206 0.903 0.677 1.000

0.669 0.571 0.415 0.257 0.549 0.630 0.488 0.254 1.171 0.384 0.225 0.371 0.174 0.306 0.844 0.165 0.568 0.278 0.358 0.287 0.231 0.389 0.493 0.426

0.476 0.390 0.604 0.554 0.400 0.376 0.582 0.669 0.148 0.398 0.743 0.545 0.693 0.557 0.337 0.717 0.326 0.540 0.512 0.592 0.621 0.562 0.532 0.524

81.37 57.24 136.24 111.24 59.68 54.00 124.40 181.06 15.51 59.09 258.61 107.06 202.12 112.65 45.51 226.73 43.20 104.99 93.81 129.65 146.44 114.68 101.87 115.39

0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

0.002 0.001 0.001 0.006 0.003 0.007 0.001 0.001 0.010 0.001 0.001 0.002 0.001 0.002 0.003 0.001 0.004 0.002 0.004 0.004 0.002 0.002 0.001 0.003

Appendix IV. Fidelity Mutual Funds : Top Winners and Losers by Business Cycle We define business cycles by trough to pear and peak to trough, and obtained dates from NBER website.
P er io d W i n n e r Dec 1994-Feb 2001

Mar 2001- Oct 2001

Nov 2001 - Dec 2007

Jan 2008 - Jun 2009

Jul 2009 - Dec 2010

Banking Portfolio Computers Portfolio Consumer Finance Portfolio Electronics Portfolio Energy Service Portfolio

Automotive Portfolio Chemicals Portfolio Constr. and Housing Portfolio Defense and Aerospace Portfolio Gold Portfolio Materials Portfolio Medical Delivery Portfolio

Chemicals Portfolio Defense and Aerospace Portfolio Energy Portfolio Energy Service Portfolio Gold Portfolio Materials Portfolio Natural Gas Portfolio

Automotive Portfolio Comm. Equip. Portfolio Computers Portfolio Consumer Staples Portfolio Electronics Portfolio Gold Portfolio Leisure Portfolio Retailing Portfolio

Air Trans. Portfolio Automotive Portfolio Comm. Equip. Portfolio Computers Portfolio Cons. Discre. Portfolio

25

L o s e r

Comm. Equip. Portfolio Gold Portfolio Materials Portfolio Medical Delivery Portfolio Telecom Portfolio

Biotech. Portfolio Comm. Equip. Portfolio Computers Portfolio Electronics Portfolio Environment and Alternative Energy Portfolio Multimedia Portfolio Natural Gas Portfolio Software and Computer Services Portfolio Technology Portfolio Telecom Portfolio Utilities Portfolio

Software and Computer Services Portfolio Telecom Portfolio Utilities Portfolio Banking Portfolio Cons. Discre. Portfolio Consumer Finance Portfolio Financial Services Portfolio Multimedia Portfolio

Software and Computer Services Portfolio Technology Portfolio

Consumer Finance Portfolio Energy Service Portfolio Financial Services Portfolio Natural Gas Portfolio Utilities Portfolio

Medical Delivery Portfolio Retailing Portfolio Telecom Portfolio Utilities Portfolio Natural Gas Portfolio

26