Why Launch Tax-Managed Momentum
Funds? 

Momentum is its own investment style on par with value and growth or large-cap and small-cap. In 2009, AQR launched a suite of Momentum Funds designed to capture the momentum premium using a systematic and transparent approach. The new Tax-Managed Momentum Funds (the “Funds”) seek to deliver the same exposure to momentum with the additional objective of improving after-tax returns.

 


 

The
Momentum Style 

“Momentum” is the tendency of stocks that have outperformed the market in the recent past (the “winners”) to keep out-performing the market in the near term. It is not about the overall direction of the market, but rather the relative performance of individual stocks. Academic studies suggest that this persistence may be due to a risk premium , where recent winners have higher expected returns, or to investor behavioral biases, including the slow incorporation of new information by investors (the “anchoring effect”) and the feedback trading from investors who buy stocks that have been recent winners (the “bandwagon effect”).

The AQR Momentum Indices (the “Indices”), introduced by AQR in 2009, provide a systematic and transparent benchmark for the momentum style. Each Index ranks the stocks in the relevant, investable universe by their total return over the prior twelve months excluding the last month, and selects only those stocks that rank in the top third, weighting them by market capitalization. This index portfolio is rebalanced quarterly.

While the Funds base their security selection on these indices, they are also managed to maximize net returns rather than merely tracking the Indices precisely. The Funds are not rebalanced mechanically, or restricted exclusively to the securities in the Indices, and they will trade opportunistically in order to strike the appropriate balance between maintaining consistent exposure to the momentum style while attempting to keep implementation costs low.  

 


 

Attractive Characteristics of Momentum 

Extensive academic research has shown that stocks with positive momentum tend to outperform their peers in the near future. By focusing on these stocks, the AQR Tax-Managed Momentum Funds seek to capture the excess returns associated with the momentum premium.

Another key attribute of the momentum style is that its excess returns tend to have a negative correlation to those of the value style. In periods when value under-performs the market, momentum tends to out-perform the market (and vice versa). Consequently, a momentum fund is an attractive complement to a value fund, where the combination of momentum and value may offer beneficial diversification and fewer periods of underperformance to the market. 

 


 

Tax Management 

The Tax-Managed Momentum Funds are designed to lower distributions of realized, in particular short-term, capital gains than funds that do not take tax consequences into account. However, investors should not expect that capital gains distributions will be completely eliminated.

The AQR Tax-Managed Momentum Funds may employ a variety of techniques designed to reduce the impact of taxes on investors’ returns, including:

  • deferring realizations of net capital gains, in particular attempting to generate long term capital gains;
  • harvesting losses to offset realized gains, in particular attempting to generate short term losses;
  • limiting portfolio turnover that may result in taxable gains; and
  • limiting the purchase of high dividend yielding stocks.

 


 

Role in
Investor Portfolios 

We believe an allocation to momentum investing can provide added diversification and improve the expected returns in many equity portfolios, especially those that overweight value securities. Investors who combine value and growth may want to consider momentum as a replacement or complement to their growth allocation.

The Tax-Managed Momentum Funds include Large-Mid Cap, Small Cap and International versions, so the Funds can be used to diversify a range of different equity allocations in investor portfolios.

The new Tax-Managed Momentum Funds seek to improve after-tax returns of the momentum style, and thus are designed for taxable accounts. The original Momentum Funds seek to maximize pre-tax returns and thus may be more suitable for tax-deferred accounts.

For more information on AQR's new Tax-Managed Momentum Funds, please
download a copy of the prospectus.