If the momentum factor is pervasive across asset classes, surely it accounts for some portion of what's generally thought of as manager "skill." But it's been difficult to compare active management strategies to relevant benchmarks and make the kind of apples-to-apples evaluations for momentum investing that an investor would for small-cap and large-cap managers against their respective indexes. Analyzing returns through a momentum prism has only just begun in the wider world of investing.

Momentum considerations are one of several "pillars" in AJO's multi-factor valuation model, says Ebrahim. "We use it to distinguish attractive stocks from unattractive ones."

A number of studies published over the years suggest that momentum also shows promise in terms of asset allocation. That has inspired some financial advisors to consider one of a growing number of publicly traded managed futures funds in client portfolios for enhancing conventional asset allocation strategies. Russell Wild, a financial planner in Allentown, Pa., has recently been analyzing the Elements S&P Commodity Trends Indicator exchange-traded note (LSC) as a potential investment. For the moment, he's "dabbling" with it in his personal portfolio. The fundamental attraction is its mandate to hold long and short positions in a wide variety of futures contracts. "It's momentum both ways," says Wild, author of Exchange Traded Funds for Dummies.

A 2009 research report by MSCI Barra looks at the historical record for targeting momentum and other "alternative betas" for enhancing results in a traditional asset allocation of stocks and bonds (The report is called Portfolio of Risk Premia: A New Approach to Diversification, by Remy Briand, et al.). The basic conclusion: Adding momentum and other non-traditional approaches to a traditional stock/bond mix can substantially lower overall portfolio volatility with a minimal reduction in return.

That's old news, as far as the research literature goes. Ditto for the institutional world's use of alternative betas for augmenting conventional asset allocation strategies. What's new is the average investor's ability to formally allocate portfolio assets to momentum investments in something approaching the beta's pure form, courtesy of the new trio of AQR mutual funds.

Momentum Index Funds
"We thought the time had come," says Ronen Israel, a principal at AQR, about the timing of the firm's 2009 launch of index products. The new mutual funds come in three momentum-tracking forms: large-/mid-cap U.S. stocks, small-cap U.S. stocks and foreign developed-market equities. The underlying indices are proprietary momentum benchmarks designed by AQR.

The 12-year AQR has a long relationship with momentum research. In particular, Cliff Asness (a former quant at Goldman Sachs and one of AQR's founding principals) has penned several studies on the subject over the years, including his 1994 Ph.D. dissertation, which reviewed momentum as one of several sources of equity return.

Among the more compelling arguments for embracing a formal allocation to momentum investments, explains Israel, is the low historical correlation with other specialty betas. Notably, momentum tends to be negatively correlated with the value effect (stocks trading below some fundamental valuation yardstick, such as the book value or a particular price-earnings ratio), he says. On the other hand, momentum tends to be positively correlated with growth. But momentum is more than a proxy for growth stocks, Israel emphasizes. "You can argue it's capturing the best parts of growth."

As evidence, he reports that AQR's large-cap equity momentum index has outperformed large-cap growth stocks (based on the Russell 1000 Growth Index) as well as the broad market (the Russell 3000) over the past three decades. For the 30 years through December 2009, the AQR Momentum Index posted a 13.2% annualized total return, the firm reports. That's comfortably above both the Russell 1000 Growth's 10.1% annual rise and the broad large-cap market's 11.1%, as per the Russell 1000. . And while AQR Momentum's correlation with the Russell 1000 Growth index is positive, it's only mildly so, at 0.43. The implication is that the momentum beta is a complement to growth, or perhaps a replacement.

The Devil In The Details
Momentum's enduring qualities may be reassuring, according to academics and practitioners, but it comes in a variety of flavors. "While momentum may seem like an excellent candidate for alternative beta," advises Ebrahim, "there are variations in how it is defined that could complicate replication." AJO defines momentum in several ways, he explains-as a trend in earnings revision, a trend in prices and a trend in trading volume, among other things.