Mark Dampier: Momentum investors, move on - we're in this for the long haul

Momentum investing is a strategy where fund managers buy the shares of companies that have been going up in price, and hold on to the shares until this trend reverses

Long-term investors can hang in there when stock markets turn (Rex Features)

When I began my career in the financial services industry, unit trust pricing was very different. Today, many commentators talk only of high fees; they would have had a shock 30 years ago when nearly all unit trusts applied an initial charge of at least 5 per cent, and sometimes 7 per cent or more.

This started to change as discounters, or fund supermarkets, came on the scene and discounted much of the initial charge and their own commission from the individual fund groups (some of which was rebated to clients). They worked to negotiate lower fees, and were instead paid renewal commission.

Fast forward to the present day and, while platforms now receive fees from their clients rather than commission from the fund groups, most unit trusts no longer apply an initial charge. The obvious benefit to investors is that more of their money gets invested on day one.

Annual management fees are also beginning to move downwards – if slowly.

Generally, all the news is good so far. However, on the other side of the coin is the rise of the "momentum investor".

What does this mean? Momentum investing is a strategy where fund managers buy the shares of companies that have been going up in price, and hold on to the shares until this trend reverses. The strategy is often short-term in nature, yet many investors are now also applying it to unit trusts, which have traditionally been viewed as long-term investment vehicles.

Statistics are now available allowing people to find out which unit trusts are performing best over short periods. The idea is to remain invested in any fund trending upwards until it goes into reverse, at which point you sell your units and reinvest in the next momentum-driven unit trust. Advocates of the strategy would say it's not possible to be left with a significant loss as you will have already sold out before a fund falls heavily in value.

In the past a high initial charge would probably have stopped this type of short-term trading. But as most unit trusts no longer apply an initial charge, it appears the main barrier has been removed. Furthermore, most platforms do not charge a switching fee between funds.

What's not to like? Well, plenty, in my view. Open-ended funds such as unit trusts are not designed for large and frequent inflows and outflows of money. It hardly helps a fund manager to have £5m flow in one day, and the whole sum to disappear only a few weeks or months later.

Nor can it be helpful to existing, genuine long-term investors. The problem is that the more people who take part, the bigger the problem for fund managers, until eventually the whole thing will need to come to a halt.

I am also suspicious of the statistics provided, because they don't take into account trading costs. With this type of approach, many investors will trade at a similar time. When managers are faced with a large disposal, a fund group can charge a dilution levy, or adjust the unit price downwards as a way of protecting existing investors in the fund. I am unsure whether these costs are included in the performance statistics.

In conclusion, I believe this short-term trading strategy is not in the favour of long-term investors. It is certainly not in the favour of managers who are left to contend with heavy flows in and out of their fund, probably at just the wrong time.

In my view, this kind of trading should be confined it to closed-end funds, exchange-traded funds and passive funds, which are far better short-term vehicles. My plea to the groups running these momentum strategies is to use these vehicles, and not open-ended funds.

Remember – some of us are genuine long-term investors.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit hl.co.uk