Search

There is now widespread evidence that investment strategies based on value and momentum have been profitable in the past. Moreover, combining value and momentum into a single investment strategy provides investment performance that is less sensitive to market cyclicality. However, portfolio managers may be reluctant to implement such strategies as they can lead to substantial departures from clientassigned benchmarks. In this paper, we implement a combined value-momentum strategy using the Black-Litterman portfolio optimisation framework, applied to a single global market comprising 177 national industry indices of the US, UK and Japan. We develop forecasting models for zero-investment value and momentum strategies, and incorporate the out-of-sample forecasts from these models into the Black-Litterman approach. The combined value-momentum strategy yields a significant improvement in performance relative to the underlying benchmark. Using the Black-Litterman model, we can effortlessly track the benchmark at the desired tracking error level under full investment, long-only and beta-neutral constraints, while producing an average annual investment outperformance of up to 0.7 percent, even after allowing for substantial transaction costs.

Using data from a U.S. household survey, we examine the empirical relation between subjective life horizon (i.e., the self-reported expectation of remaining life span) and portfolio choice. We find that equity portfolio shares are higher for investors with longer horizons, controlling for gender-specific age effects, socio-economic characteristics, health, and optimism. Our result is robust to accounting for the endogeneity of equity market participation or instrumenting subjective life horizon with parental survival. Finally, we show that the effect of a shortening horizon on portfolio allocation is stronger for households without bequest motives.