In his H1 letter to Fundsmith Equity Fund investors this past July, Fundsmith CEO Terry Smith surprisingly announced that he had pivoted to a more momentum-driven style of investing. Smith said he wasn’t sure when momentum investing would stop working, only that it will. He is correct, because, of course, all factors stop working eventually. But momentum (while it certainly has its fits and starts, as we’ve seen recently) has worked well: As any quant will tell you, it’s one of the most robust factor premia on record, persisting out of sample across time periods, geographies and asset classes.
The S&P 500 momentum index selects roughly 100 S&P 500 companies based on prior risk-adjusted momentum, excluding the most recent month, and applies volatility-based weighting and concentration constraints. It’s outperformed the regular S&P 500 by 4.6% annually over the ten years to 31 July 2026—and that’s after an 11% pullback in July. Momentum has clearly worked not just this year, but for the last decade. Anyone who dogmatically derides it isn’t paying attention.
As value-focused investors (with a differentiated view on what constitutes value), we’re momentum-agnostic. Many of our peers view momentum as a dirty word, often using the pejorative “momo” to describe both the style of investing and the stocks themselves. But this view ignores the fact that some stocks deserve strong momentum because their fundamentals are strong and inflecting. We’d go so far as to say that if, at any given time, at least one of your stocks isn’t in someone’s momentum bucket, you’re probably doing something wrong. To be clear, this is not an endorsement of momentum. Nor is it our “Fundsmith Moment.” We’re not announcing a pivot towards momentum investing. Rather, as value-oriented investors who have owned so-called “momentum stocks,” we feel it’s important to point out that the current discourse is entirely too polarized.
We believe the optimal state is to be momentum-agnostic but aware. Investing solely on price momentum is foolish, but ignoring momentum, and the massive pools of capital invested in the style, is also foolish—as is letting a stock’s classification as a “momentum stock” skew your analysis of its intrinsic value. Dogma is a dangerous thing in this business. Ten years of data might argue for leaning into momentum. But the same index has seen its annualized outperformance narrow over 20 and 30 years (~1.5% over 20 years and ~2.2% over 30) to a level we believe fundamental analysis can beat over similar horizons. So, while momentum is a durable investment “theme,” it has its own ebbs and flows, and those bring plenty of risk. Perhaps Fundsmith is discovering that now.
So, what should value investors do when they find themselves owning momentum stocks? First, unlike our peers, we do not believe stocks with positive momentum are inherently bad. If anything, we assume something good is happening at the fundamental level. We hunt for mispricings, and the common belief is that they appear only when price action is falling or sluggish. That’s often true, and we love to bottom-feed as much as anyone. But it’s just as common for a stock with strong momentum to remain underpriced, with the market only partially pricing in the positive developments and their potential. Nvidia is the classic example: the market simply couldn’t comprehend how good things were.
Sometimes, though, momentum gets ahead of itself and prices run too far. That does not mean a stock’s value won’t be higher in the future. It means a lack of catalysts, or a negative one, can break the momentum before that potential value is crystallized, and the position becomes a short-term drag on performance. Sometimes the right move is to sell and buy back later. But as tax-aware investors, with most of our capital in taxable accounts, we often have better options. Let’s look at some examples:
From the Book
Nebius’ price rose rapidly in June, thanks to Nasdaq-100 inclusion, the acquisition of Eigen AI, which strengthened its position as a full-stack AI cloud, and the growing trendiness of the neocloud trade. The move was grounded in fundamentals, yes, but its velocity indicated that the stock was a momentum darling. Our price target still sits above the June highs, but we looked to the options market for positively skewed risk/reward to exploit.
Layering options onto core convictions does several things for us. First, it removes some of the need to time a reversal perfectly. Selling or trimming and then buying back or adding to a position all depend on timing. The options market gives us longer-dated windows in which to create our own risk arbitrages. In this instance, we wrote calls at $300 and $350 that, if assigned, would have represented about 1/3 of our Nebius position, and turned a nice profit on them when the AI trade unwound in July. Had the momentum continued, we would have been happy to take assignment on those options and offload portions of our equity position at those prices. This was a prime example of our options strategy working as it ought, though success is not always assured.
Sometimes, the benefit of trimming or adding is simply too obvious to ignore. The ASTS drawdown in the last few months was one such instance, and we added near the lows. Given the serious catalysts we see in the next six to eighteen months, the price was too attractive to pass up. Before adding, though, we wrote $80 puts while the price straddled that level. Could we have simply written more options instead of adding? Sure, but when you know a business as well as we believe we know this one, there comes a point where the instinct to add or trim becomes too strong to sit on. To that end, why limit yourself to exploiting mispricings in one domain, when you can maximize your insights in several of them at the same time? If there’s a mispricing in the equity, there may be a compounded mispricing in the options.
Sense-Checking
With all that said, we try to avoid pure gut reactions. When we navigate the short-term volatility that comes with momentum trades, our deliberation centers on two areas: (1) testing our own frameworks and (2) reading short-term factors and trading dynamics.
Nick Sleep regularly referred to some variation of the cartoon above when discussing herd mentality. One man looks up into the sky at nothing in particular, and soon a crowd gathers around him trying to see what he sees. Which, of course, is nothing. But the draw to imitate combined with the fear of missing out pushes crowds of people to do irrational things. So when momentum carries a name past its fundamentals, we ask ourselves: Are we getting carried away with the crowd? What are we missing? We constantly try to poke holes in our own arguments. With Nebius in June, the speed of the price action told us expectations were beginning to outrun execution. Not that execution wasn’t around the corner. Rather, the name was being bucketed into a broader trade whose short-term execution and long-term prospects we were less comfortable with. In short, the stock was beginning to run away from us. So, to let profits run while limiting the damage if the move reversed, the options market was the clear answer.
In other instances, we test our conviction in a name against the reality of capital flows, using our internal risk metrics as a quantitative layer on top of our qualitative framework. The qualitative layer asks whether we still believe the thesis, while the quantitative layer asks whether the market’s positioning can hurt us before the thesis plays out. Reading the qualitative sentiment in ASTS is simple. In our view, the market still treats direct-to-device communications as Starlink’s to lose. Only two things will reverse that view: commercial partnerships and satellite launches, because they’re what give investors a line of sight to revenues. Both will take time.
Until then, the stock trades less on fundamentals than on factor exposure, which can dictate large moves. So, we covered some of our downside through the options market while adding to the position. That combination matched our own confidence on one side and the market’s perception on the other. Our hours of research and conversation behind each name make this sort of sense-checking easier to do. It matters most at the extremes, when a drawdown breeds anxiety or a rally breeds exuberance. In those moments we return to our judgment frameworks, use quantitative measures to back-test our intuition, and go to the options market to structure trades we can win. That discipline lets us hold key names through volatility while hedging against the speed of the momentum factor.
Conclusion
As we’ve said throughout, the push of the momentum trade, and its market-moving power, are not something we dismiss or avoid. We remain agnostic and treat it as something to be navigated: a key factor in the public equities game that every fund manager should strategize around. When a stock gets picked up by the momentum trade, we tend to read it as a sign that the fundamentals we underwrote at the start are kicking into full, or at least fuller, gear. But we do our best never to rest on our laurels, or to wallow if we end up on the wrong side of the P&L ledger. Looking for ways to steward our capital, limit our downside, and create our own asymmetric risk/reward is a tenet of our investment philosophy—and a proven winner.
