Improving Diversification by Adding Momentum

For investors looking to balance risk mitigation with cost considerations and return potential, we offer momentum strategies as a potential solution.

While all prudent investors consider the risk of capital loss when making investment decisions, the methods employed to manage that risk can vary widely. Positions in more “defensive” assets such as bonds or gold, market-timing strategies and investing in volatility products such as options are just a few of the approaches investors have taken in an attempt to protect their portfolios from a market drawdown. Each of these comes with pros and cons, of course, along with associated implicit or explicit costs that must be considered.

This paper describes the characteristics of momentum strategies, the role they may play in a diversified portfolio and their historical performance across market environments. We use the Neuberger Berman Breton Hill Velocity strategy as an illustration of how momentum strategies may be brought together in a single strategy that seeks to generate return in most market environments while also seeking to protect capital during periods of stress.

Hypothetical Backtested Performance Disclosures

The hypothetical performance results included in this material are of a backtested model portfolio that is shown for illustrative purposes only. The hypothetical results were calculated by running the model portfolio on a backtested basis using the stated methodologies and assumptions below. The results are shown on a supplemental basis and do not represent the performance of any Neuberger Berman managed account or product and do not reflect the fees and expenses associated with managing a portfolio. The results assume no withdrawals and reinvestment of any dividends and distributions. Standard fees applied are a management fee of 0.75% per annum and estimated transaction costs.

The following is a summary of the backtested methodology and assumptions for the NB BH Velocity Model Portfolio:

The NB BH Velocity Model Portfolio is constructed using the following approximate risk allocations: 40% Equities, 20% Commodities, 20% Currencies and 20% Multi-Asset Trend. Allocations in the current live NB BH Velocity strategy differ from the allocations represented in the NB BH Model Velocity Portfolio.

Hypothetical backtested returns have many inherent limitations. Unlike actual performance, they do not represent actual trading. Since trades have not actually been executed, results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity, and may not reflect the impact that certain economic or market factors may have had on the decision-making process. Hypothetical backtested performance also is developed with the benefit of hindsight. Other periods selected may have different results, including losses. There can be no assurance that Neuberger Berman will achieve profits or avoid incurring substantial losses. Neuberger Berman managed accounts in the manner reflected in the models during a portion of the backtested time periods shown.

Unless otherwise indicated, results shown reflect reinvestment of any dividends and distributions. The hypothetical performance figures are shown gross of fees, which do not reflect the deduction of investment advisory fees and other expenses. If such fees and expenses were reflected, returns referenced would be lower. Advisory fees are described in Part 2 of NB BH’s Form ADV. A client’s return will be reduced by the advisory fees and any other expenses it may incur in the management of its account. The deduction of fees has a compounding effect on performance results. For example, assume Neuberger Berman achieves a 10% annual return prior to the deduction of fees each year for a period of 10 years. If a fee of 1% of assets under management were charged and deducted from the returns, the resulting compounded annual return would be reduced to 8.91%. Please note that there is no comparable reduction from the indices for the fees.

Additional Disclosures

This material is presented solely for informational purposes and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Third-party economic, market or security estimates or forecasts discussed herein may or may not be realized and no opinion or representation is being given regarding such estimates or forecasts. Certain products and services may not be available in all jurisdictions or to all client types. Unless otherwise indicated, returns shown reflect reinvestment of dividends and distributions. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

The CBOE S&P 500 Volatility Index® (VIX) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility. Several investors expressed interest in trading instruments related to the market's expectation of future volatility, and so VIX futures were introduced in 2004, and VIX options were introduced in 2006.

The MSCI World (Net) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. Net total return indexes reinvest dividends after the deduction of withholding taxes, using (for international indexes) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties. Net total return indexes reinvest dividends after the deduction of withholding taxes, using (for international indexes) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties.

The Bloomberg Barclays Global Aggregate Index provides a broad-based measure of the global investment-grade fixed income markets. The three major components of this index are the Bloomberg Barclays U.S. Aggregate, the Bloomberg Barclays Pan-European Aggregate and the Bloomberg Barclays Asian-Pacific Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds, Canadian government, agency and corporate securities, and USD investment grade 144A securities.

The SG Trend Index is equal-weighted and reconstituted annually by SG Prime Services. The index calculates the net daily rate of return for a pool of trend-following based hedge fund managers and is designed to track the largest trend-following CTAs and be representative of the trend followers in the managed futures space.

Client accounts are individually managed and may vary significantly from composite performance and representative portfolio information.

This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Neuberger Berman Breton Hill ULC and its affiliates are not providing this material in a fiduciary capacity and have a financial interest in the sale of their products and services. Investment decisions and the appropriateness of this material should be made based on an investor’s individual objectives and circumstances and in consultation with his or her advisors. This material may not be used for any investment decision in respect of any U.S. private sector retirement account unless the recipient is a fiduciary that is a U.S. registered investment adviser, a U.S. registered broker-dealer, a bank regulated by the United States or any State, an insurance company licensed by more than one State to manage the assets of employee benefit plans subject to ERISA (and together with plans subject to Section 4975 of the Internal Revenue Code, “Plans”), or, if subject to Title I of ERISA, a fiduciary with at least $50 million of client assets under management and control, and in all cases financially sophisticated, capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies. This means that “retail” retirement investors are expected to engage the services of an advisor in evaluating this material for any investment decision. If your understanding is different, we ask that you inform us immediately.

Neuberger Berman Breton Hill ULC is a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended. In Canada, Neuberger Berman Breton Hill ULC is registered as: (i) a portfolio manager and exempt market dealer in Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan, (ii) an investment fund manager in Ontario and Québec, and (iii) a commodity trading manager in Ontario.

Effective as of November 1, 2017, Breton Hill Capital Ltd. was acquired by Neuberger Berman and, in connection with the transaction, its name was changed to Neuberger Berman Breton Hill ULC.

The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.