Predicting Equity Fund Returns: The Impact of the Momentum-Factor on Performance

Abstract: Momentum has been a persistent and robust factor in explaining excess future returns, generating great interest from investors and financial analysts. Following the financial crisis of 2008 and the Covid-19 pandemic, there have been instances of significant momentum crashes. US Equity funds are used to gain insights about the properties of momentum and its predictive ability. Momentum performance is evaluated over the period 2000 to 2023. A multifactor model is developed, using factor attribution to explain the impact on fund performance over time by factors such as risk, size, value-growth orientation and momentum. Conclusions can be made that while momentum have previously been successful in predicting future returns, particularly for growth-oriented funds, recent market situations have lead to underperformance. The multifactor model, incorporating size and value-growth orientation, suggests that momentum is not entirely responsible for the poor performance following the Covid-19 crisis.