Momentum Strategy - Explained
A beginner-friendly explanation of Momentum Strategy in value investing.
Momentum Strategy Explained
An investment approach that allocates to the largest companies based on market weight, creating self-reinforcing price increases
What It Means for Investors
Definition
A momentum strategy is an investment approach that allocates capital based on recent price performance or market capitalization weight — the assumption being that rising stocks will continue to rise. Terry Smith argues that index funds are implicitly a momentum strategy: money flows to the largest companies, boosting their prices further, which increases their weight, attracting more flows.
Passive Investing as Momentum in Disguise
Smith's key insight from the 2025 Fundsmith AGM:
"Index investing is only passive in that there's no fund manager involved — it's actually a momentum-based strategy. Money going into index funds is allocated based on market weight, meaning the biggest companies get most of the inflows, boosting their share prices further."
Key Takeaway
An investment approach that allocates to the largest companies based on market weight, creating self-reinforcing price increases