Top-Momentum MSCI World

Construction of Top-Momentum MSCI World Portfolio’s

In this section we will construct Top-Momentum Portfolio’s based on the stocks that constitute the MSCI World Index at this moment.

Historical price data are available from 2004 onwards. Because we need a lookback period (which can be up to one year), we will be able to construct portfolio’s starting from the year 2005.
With the TopMomentum strategy we will regularly determine the stocks that got the best return in a previous period. We then construct an equally weighted portfolio of the best performing (TopMomentum) stocks. These portfolio’s will later be rebalanced at specific intervals.


In this backtest we will look for the optimal settings for the following parameters:
– Momentum (MomVar): lookback period for which we calculate the momentum. Because previous tests show that shorter lookback periods are less interesting, we use periods of 9,10,11 and 12 months (Mom_9M to Mom_12M). We also test the so-called Mom_12min1M setting where we calculate the momentum for the period x-12 months to x-1 month. In addition, we will also calculate the average momentum for the periods of 1,3,6 and 12 months (Mom_AVG)
– Rebalancing period (R): frequency at which we will change the composition of our momentum portfolios based on the most recent Momentum data. For R, we test values ​​from 1 to 6 months, as well as 12 months.
– The number of TopMomentum stocks in our portfolio’s (n).

Results of the backtests.

Figure 1. Annualized Return of Top-Momentum MSCI World for different MomVars and different n values. Rebalancing range is 4.

We see that, after a short initial increase, the return of the TopMomentum portfolios decreases exponentially with larger selections of stocks in the portfolio. This is a convincing illustration of the importance of the Momentum anomaly.
Because, in this test, we mainly aim for a high return, we will limit the further analysis to n-values ​​that do not exceed 50.

Figure 2. Annualized Return of Top-Momentum MSCI World for different MomVars and different n values up to n50. Rebalancing range is 4.

Figure 2 shows that – at least for R4 and Mom_12M – the returns remain very high until n20. Based on these findings, we set our optimal settings for n to 15 and for the lookback period to 12 months (Mom_12M).

Figure 3. Annualized Return of Top-Momentum MSCI World for different R values. MomVar is Mom_12M.

In Figure 3 we see that five-monthly rebalancing shows the highest peak in returns at n10. Four-monthly rebalancing shows better returns starting from n15. For this reason and because, with four-monthly rebalancing, there is a rebalancing moment at the beginning of every year, we prefer R4 as the optimal value.

In the table below we summarize the most important metrics for the TopMomentum strategy with optimal parameter settings. And we will also compare these with the metrics of the benchmark: annually rebalanced equally weighted portfolios with all stocks from the selection (MSCI World composition at this time) for which data is available from the start of the year.

Table 1. Metrics for optimal TopMomentum MSCI World strategy and for the Benchmark

Figure 4. Wealth Optimal Strategy MSCI World and Benchmark

Figure 4 illustrates the large difference in long-term returns between the optimal strategy and the benchmark, due to compounding of returns. To get a better view of the (lower) volatility of the benchmark, we show the 2 Wealth curves in Figure 5 in separate plots and therefore with different scales for the Y-axis.

Figure 5. Wealth Optimal Strategy MSCI World and Benchmark with different scales for the Y-axis.

Our next figure (figure 6) clearly demonstrates that the superior returns of the optimal TopMomentum portfolio are not caused by a limited number of excellent years. In contrast, most of the years returns are better for the Optimal Strategy (TopMomentum MSCI World R4n15 Mom_12M) than for the Benchmark.

Figure 6. Return optimal strategy MSCI World compared to return of the benchmark.

Conclusion Top-Momentum MSCI World

As we demonstrated for S&P500, Top-Momentum portfolios based on MSCI World have superior returns compared to an equally weighted portfolio consisting of all stocks of MSCI World. This comes with a cost of higher volatility and larger maximum Breakdown. Optimal parameter settings are R4, n15 and a lookback period of 12 months (Mom_12M).

The superior returns are not caused by a limited number of excellent years. Most of the years the TopMomentum strategy outperforms the benchmark.