These are hard times for momentum investors who manage quantitatively constructed portfolios that often win big in strong markets, but languish when sentiment turns negative.
Such is the case for Richard Morin, co-manager of Landry Morin Canadian Momentum Series B, launched last April, just as the equity markets began to turn down. From inception to Oct. 31, the fund has lost 26.4%, more than double that of the benchmark S&P/TSX 60 Index, which was down 11.3%.
But in its previous version, available only to accredited investors, that large-cap investment mandate returned 35.9% in 2010 and 42.7% in 2009. That was far ahead of its market benchmark's 13.8% and 31.9%, respectively.
"We beat the market in both those years, because we were concentrated in basic materials stocks," says Morin, chief operating officer at Montreal-based Landry Morin Inc. By late 2010, the fund had up to 80% in stocks such as First Quantum Minerals Ltd. FM and Teck Resources Ltd. TCK.B.
"When momentum works, it works very well. When it doesn't work, you're hurt bad," admits Morin. "These periods, like what we're seeing in 2011, come with the territory. You cannot have a momentum strategy without going through these periods."
Morin and co-manager Jean-Luc Landry have long emphasized resource names. But market leadership began to change in the first quarter of 2011. "Momentum strategies do well in a trending market. They suffer when markets turn around."
Similarly, the fund underperformed the index by 8.2 percentage points in 2008, for similar reasons to 2011. Back then, its over-weighted resources position was savaged by the global financial crisis.
Today, Morin argues, it's hard to discern market leadership, given the turmoil over the European debt crisis. As a consequence, he has become defensive. He has emphasized precious metals stocks, such as Franco-Nevada Corp. FNV, consumer staples names such as Alimentation Couche-Tard Inc. ATD.B and health-care stocks such as Valeant Pharmaceuticals International Inc. VRX.
"Gold bullion will do well if the financial crisis does not abate," says Morin. "And if gold does well, gold stocks will do even better because they have not reflected the gold price. And if there is no sustained economic recovery -- although I hope there will be -- health-care stocks will weather the storm better. People will continue to buy drugs."
A native of Val-d'Or, Quebec, Morin grew up in Montreal, where he earned a bachelor of economics at the University of Montreal in 1982, and an MBA at McGill University in 1988. He spent a decade at the Montreal Exchange, where he had several posts that concluded with him setting up the futures operation.
In 1996, Morin went to the African nation of Mauritius. As chief executive of that country's stock exchange, he oversaw a series of regulatory and operational reforms. In 1998, he moved to Abidjan, Cote d'Ivoire, as head of mission for the creation of the West African Regional Stock Exchange.
A year later, Morin returned to Canada and landed a post as vice-president at National Bank of Canada, where he re-organized the firm's discount-brokerage operation. Later, he joined The Jitney Group Inc., a broker-dealer, and was instrumental in setting up the online trading division.
In 2002, he teamed up with Landry, a former CEO of Montrusco Bolton, who espoused momentum investing and had launched such a product at Montrusco. In 2003, they introduced the Canadian fund. Currently, the firm has about $50 million in assets under management, spread across four funds. The minimum investment is $5,000.
Morin and Landry use proprietary filters that select stocks from a list of the 100 largest names on the Toronto Stock Exchange. They pick anywhere from 12 to 20 names, depending on conviction and market conditions, and hold them for at least three months. Single holdings can go as high as 12% of fund assets. Portfolio turnover is high, at more than 200% annually.
What Morin's names have in common is that they have been the top performers over the previous 12 months. "The stock has a 60% chance of beating the market going forward," he says.
Morin looks after the firm's operations while Landry is a "big picture" manager who ensures the investment process is consistent. "And 60% odds are excellent, as long as you have the discipline. You have to get rid of your losers swiftly, and keep the winners as long as they remain winners. As soon as they start to underperform, you sell them."
Every three months, each stock has to successfully pass through the filters to remain in the portfolio. If a stock fails, it's sold. "No argument, no procrastination. It's out the same day."
While markets have been unkind this year, Morin is confident that sentiment will turn again, as it did in previous years. "When better times do come, they tend to be very strong," he says, adding that momentum investing makes for a good complement with value investing that is currently in favour.
In 2009, Morin notes, the fund began as a laggard, and by year-end it outperformed the benchmark. "The bottom line is the fund will make it back again. We know it will," says Morin. "The question is, when?"
