Plenty of Room for Momentum and Value Stocks in His Portfolio, Guru Focus 6/19/2018

Colin Exelby was recently interviewed by Yamil Berard at for a great article about investment strategy.

Colin Exelby spent almost a decade at Morgan Stanley before founding his own wealth management firm, Celestial Wealth Management, several years ago. The Maryland-based organization operates as a small boutique financial planning and investment management firm.

Exelby likes to “marry” value and momentum strategies for his clients. He believes the two strategies are equally attractive and limit his clients’ exposure to stocks that do not have momentum and are not undervalued. Exelby believes investors can seize on the best of both worlds by adopting both strategies.

Meanwhile, he also shared some good news for value-oriented strategists: He believes the strategy, after a high-momentum period on Wall Street, is likely on its way back.

What is your goal?

"We tailor our investment portfolios to what clients are looking for. We’re not an investment manager that has one mandate, such as just value or just momentum, just large-cap, just international. We’re building allocations, using various exchange-traded funds, individual stocks, mutual funds, assembling alternative investments, in order to build a well-rounded portfolio. At our core, what we’re trying to produce are cost-effective portfolios that work over the long-term for our clients."

OK, so what is your “strategy?”

"Most people call us 'allocators' as opposed to, 'Here’s a model that we design, which sticks to one discipline and that’s it.' There are a lot of firms out there that do things in that way. We felt that with the dynamic economy, what people are looking for is a firm that can manage all of their assets and combine multiple strategies together to create a portfolio that will work for them during thick and thin. There are some people that we get referred to that are looking for that (a single strategy). What we are trying to go through in our processes is thinking about markets in general and why we choose these different disciplines within a portfolio. If you think about diversification of strategy, the analogy I use is, it’s like a garden. If everything is blooming at the same time, it’s all going to be dead at the same time. So, if you’re working on a garden, it’s like constructing a portfolio, you want something that works well throughout the whole year."

Some value-oriented investors might think you are introducing weeds. How would you respond?

"We find that a lot of individual investors, as well as other financial advisers, because that’s the easiest thing to sell, they do whatever is working at the moment and inevitably, people jump on a trend when it’s nearing its apex. Then they get a little bit of good performance and a lot of frustration.

To be sure, we don’t want to be performance chasers. That’s not something we do in allocating money. We plan over the long term.

We find a lot of people in our industry who are wedded to one philosophy or one style and we can look at it and say why does it have to be all or nothing, why not combine multiple styles that potentially smooth the ride for the investor over time?

I remember back in 1999, 2000 to early 2001, and really from 1997, the high-momentum, high-growth-oriented investors were doing extremely well. Back then, those kind of deep-value contrarian strategies were not working as well. They were still making money but underperforming. Many of those strategies lost a significant amount of money. So, as some people began to withdraw money out of them, of course, right after that, at that point, in 2002, the second half 2001, in 2003, value really showed its stripes and why you should have that strategy as part of a portfolio."

OK, so what is the downfall, as long as you stick to good strategies?

"In truth, so many studies that have shown the presence of different factors that you can potentially exploit over long periods of time and two of the most widely accepted are momentum or trend and the value factor. The problem for investors is, in my opinion, that they have trouble sticking to both factors, especially when one is doing well and one is not, typically."

Tell us how you do that.

"So, on the value portfolio side, you can either use a broad market-cap-weighted value based ETF, or you can use value-factor ETF. You can also use value mutual funds. You can use a value stock portfolio that you are choosing based on your own metrics. There are a lot of ways that you can employ the value side of the portfolio.

Momentum is different from growth investing. With growth investing, you’re holding out for future growth. With momentum, you’re actually seeing it right now and it’s typically done on a computer algorithm. Again, there are ETFs dedicated to momentum. You can screen for stocks that are showing momentum over the last six months.

The key is to rebalance the investment. If you just put in 50-50 value and momentum and then, after a year, momentum has done really well and value has done really poorly, you’re probably going to be tempted to let it keep going. What you have to do is to be disciplined about it and systematic about it and rebalance. Pull some profits from the winner and add to the one that lagged behind if you believe in the reversion to the mean."

What is the strength of your strategy?

"There’s some skepticism coming into value right now. Some people have questioned whether the value factor has been exploited to the point where it’s not factor anymore.

It’s tough but that’s the advantage that we have as an allocator. We don’t have to be wedded to one discipline so when we’re thinking about portfolios, in my opinion, we think of it like a barbell where you’re lifting weights. The momentum factor is on one side. So companies that have exhibited strong momentum over the last six months will likely exhibit strong momentum over the next six months. The value factor is on the other side. In the end, what we do is, if we’re focused on those two ends of the barbell, we ignore the companies in the middle that are not cheap, don’t have good value and not sporting momentum.

Our clients don’t have an infinite holding period. We’re dealing with individuals who are dealing with their lives. So having the two strategies together is a good way to work in these markets.

I think there’s a potential that a lot changed with the introduction of quantitative easing from the academic level to actually being employed or transferred into the markets. Because of that, it is pushing everyone out the risk curve. It just may have changed how the markets work and function, and we don’t know that. But, it seems like it is rewarding companies in industries that show great growth and it is rewarding them with outsized momentum and valuation; that could completely change in the future. But, that, we do not know.

Is value dead? I don’t think so, but what if it is? You don’t have to have one strategy in my world."

To read the article at GuruFocus:


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.

Diversification does not protect against market risk Asset allocation does not ensure a profit or protect against a loss.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

Asset allocation does not ensure a profit or protect against a loss.