The notion of equity styles has been around for decades. An equity style is simply an equity class, a portfolio of stocks that share a common characteristic (e.g., small-cap stocks). A large body of both academic and industry research has been devoted to style investing. In recent years, average return differences between styles, such as the difference between growth and value stocks, have become the focus of many investigations. For example, Rosenberg, Reid, and Lanstein (1985), Fama and French (1992), Lakonishok, Shleifer, and Vishny (1994), and Roll (1997), among many others, have examined the long-term relative performances between growth, value, small-cap, and large-cap stocks. Meanwhile, the potential success of style rotation strategies has also attracted numerous studies (e.g., Beinstein (1995), Fan (1995), Sorensen and Lazzara (1995), Kao and Shumaker (1999), Levis and Liodakis (1999), and Asness et al. (2000)). These studies conclude that various dynamic style strategies are profitable and suggest that relative performances between equity styles are time-varying and predictable. In addition to the attempts to explore investment strategies, the concept of styles has also been utilized in the evaluation of managed portfolios. Most notably, Sharpe (1992) proposes an asset class factor model for performance attribution of mutual funds. Daniel et al. (1997), Fung and Hsieh (1997), and Ibbotson and Kaplan (2000) have extended Sharpe's style analysis in several ways.

In this article, we provide a multifactor analysis of style momentum. Style momentum is a combination of style rotation and momentum strategies. Specifically, we consider a set of size and book-to-market sorted portfolios that represent well-known investment styles, and rank the style portfolios in each month according to their returns over the previous month. A style momentum strategy buys the winner style and short-sells the loser style. This style strategy generates significant profits. Over the period from 1960 to 2001, the average return of the winner is, on an annualized basis, more than 16 percent higher than that of the loser. This return difference is significantly larger than the difference between the average returns of any two style portfolios. More surprisingly, conventional risk adjustment using the Fama and French (1993) three factor model appears to strengthen, rather than explain, the style momentum profits, although the model does capture much of the variation in the returns of the underlying style portfolios. The Fama-French three factor regressions do not provide any evidence that the strategy of buying the winner is any riskier than that of buying the loser. According to the regression intercepts, the risk-adjusted return difference between the winner and loser strategies is even larger than the raw return difference.