22 Years Of TAAStrategies

We are just two years into the new decade yet it has already succeeded in repeatedly upending the expectations of most in the financial community. We’ve experienced a pandemic, a brief collapse in the credit markets, a brief equity bear market, an unprecedented easing of monetary policy, unimagined fiscal stimulus, a raging non-stop equity rally, global energy shortages, a sharp increase in inflation, and now, a sharp contraction of monetary policy.

It would take pages to weave all of this into a half-baked cause and effect narrative. Instead, I’m going to write about how our Tactical Asset Allocation Strategies have navigated both long term and more recent challenges.

What Is Tactical Asset Allocation?

I’ll begin with a short introduction to Tactical Asset Allocation for those new to the subject.

Tactical Asset Allocation (TAA) is among the best investment tools available for navigating Full Market Cycles. While TAA may lag in late bull markets, it generally outperforms in bear markets and early-mid stage bull markets. TAA offers opportunities for higher Compound Annual Growth Rates and lower Maximum Drawdowns across full bull/bear market cycles. Among the greatest strengths of TAA is its mechanical, rules-based approach, which not only keeps the portfolio attuned with market conditions but reduces the anxiety of managing the portfolio.

Please see What Is Tactical Asset Allocation? How Does It Improve Returns? for a more complete discussion of Tactical Asset Allocation. One quote from the whitepaper summarizes the differences between Tactical Asset Allocation and Modern Portfolio Theory:

“Perhaps the single biggest distinction between Tactical Asset Allocation and Modern Portfolio Theory is that while Modern Portfolio Theory seeks to reduce risk by spreading it across several asset classes, Tactical Asset Allocation seeks to reduce risk by cutting it.” - Earl Adamy

TAA has been a passion since I began my studies a decade ago. Early in my research, I was content to study and experiment with strategies developed by others. However natural curiosity coupled with decades of software development experience led me to begin tinkering with spreadsheets. Tinkering was soon followed by the construction of ever more sophisticated TAA strategies. In early 2014, I completed my first large-scale Tactical Model which provided a platform for developing and testing increasingly sophisticated tactical strategies.

I began using my own strategies for a small portion of my family portfolio in 2012 and gradually added to our investment as my confidence grew stronger based on observable results. A significant portion of our family investments has been managed using these strategies since 2015. I have been publishing these strategies since early 2016.

Birds Eye View: 2000 - 2021

The Adaptive Global and Adaptive Income strategies provide credible results for three full market cycles beginning in 2000. This period includes two major bear markets and a short, quick bear market. The tables presented below will provide the basis for the discussion which follows.

Adaptive Global

Tactical Adaptive Global provides broad exposure to domestic and international equities, fixed income, real estate, commodities and precious metals. The strategy incorporates our Adaptive Dynamic Momentum and volatility management algorithms which (typically) selects and weights 4 funds. Rebalancing is performed once per month.

(See our whitepaper: Tactical Adaptive Global)

Adaptive Global returns on both an absolute and risk adjusted basis far exceeded those of the S&P 500. Note that just 42% of the strategy was invested in equities while 36% was invested in fixed income, and 22% across real estate, precious metals and commodities, and cash.

Comparison: Tactical Adaptive Global versus the S&P 500. Please see the notes at the end of the article for more information about the TAAStrategies tables.

Summary for 22 years: Adaptive Global vs S&P 500

  • Compound Annual Growth Rate: 14.9% for Adaptive Global vs 7.4% for S&P 500
  • Maximum Monthly Drawdown: 7.7% for Adaptive Global vs 50.8% for S&P 500
  • Years With Annual Returns Exceeding 10%: 16 for Adaptive Global vs 13 for S&P 500
  • Years With Maximum Monthly Drawdowns Exceeding 10%: 0 for Adaptive Global vs 9 for S&P 500
  • Standard Deviation Of Monthly Returns: 9.4% for Adaptive Global vs 15.0% for S&P 500
  • Up/Down Ratio Of Monthly Returns: 337% for Adaptive Global vs 179% for S&P 500

Adaptive Income

Tactical Adaptive Income invests across a diversified basket of domestic fixed income subclasses designed to provide a high level of income coupled with exceptionally low risk. The strategy incorporates our Adaptive Dynamic Momentum and volatility management algorithms which (typically) selects 1 fund. Rebalancing is performed once per month.

(See our whitepaper: Tactical Adaptive Income)

Adaptive Income returns on both an absolute and risk adjusted basis significantly exceeded Vanguard Total Bond Market Index Fund. It also exceeded the absolute and risk adjusted returns of the S&P 500!

Comparison: Tactical Adaptive Income versus the Vanguard Total Bond Market Index Fund, a domestic income fund which seeks to track the performance of a broad, market-weighted bond index. (The strategy was in cash for the four blank months.)  Please see the notes at the end of the article for more information about the TAAStrategies tables.

Summary for 22 years: Adaptive Income vs Vanguard Total Bond Fund

  • Compound Annual Growth Rate: 9.8% for Adaptive Income vs 4.6% for Vanguard Total Bond (and 7.4% for the S&P 500)
  • Maximum Monthly Drawdown: 3.9% for Adaptive Income vs 4.2% for Vanguard Total Bond (and 50.8% for the S&P 500)
  • Years With Annual Returns Exceeding 5%: 19 for Adaptive Income vs 12 for Vanguard Total Bond
  • Years With Maximum Monthly Drawdowns Exceeding 5%: 0 for Adaptive Income vs 0 for Vanguard Total Bond
  • Standard Deviation Of Monthly Returns: 4.3% for Adaptive Income vs 3.5% for Vanguard Total Bond
  • Up/Down Ratio Of Monthly Returns: 589% for Adaptive Income vs 246% for Vanguard Total Bond

Close-up View: 2020 & 2021

Adaptive Global

During 2020-2021, the S&P sank 35% (top to bottom) and then soared 217% for a stellar return of 23.4%.

Adaptive Global began 2020 with full positions in equities and commodities, reduced risk on February 1st (well before the crash began), maintained conservative allocations through and post-crash, then gradually increased risk exposure through most of 2021. Finally, it began reducing risk exposure in late 2021 as both equity and fixed income markets began to wobble.

  • January 2020: 54% domestic big cap equities, 46% commodities and Asian equities.  -2.4%
  • February 2020: 27% domestic big cap equities, 73% investment grade and Treasury fixed income -0.5%
  • March 2020 (crash) - May 2020: 75% Treasuries and 25% investment grade +1.5%
  • June 2020: 5% Asian equities, 95% investment grade and Treasury fixed income +0.4%
  • July 2020: 10% precious metals, 90% Treasuries +2.7%
  • August 2020: 14% domestic big cap, 23% int’l real estate, 24% precious metal, 40% Treasuries +0.8%
  • September 2020: 21% domestic big cap, 35% int’l real estate, 9% precious metal, 35% Treasuries -2.2%
  • October-July 2021: : 50%+- domestic big cap equities, 25% Asia equity, 25% commodities + 28.5%
  • Aug-Nov 2021: 50%+- domestic big cap, 10% commodities, 40% Treasuries/cash -1.29%
  • Dec 2021: 50% domestic big cap, 50% cash +1.3%

Domestic big caps accounted for 49% of returns, commodities 25%, Asia 17%, and 9% other.

Comparison: Tactical Adaptive Global versus the S&P 500.

This is how they compared for the two years:

  • Compound Annual Growth Rate: 16.0% for Adaptive Global vs 23.4% for S&P 500
  • Maximum Monthly Drawdown: 4.2% for Adaptive Global vs 19.4% for S&P 500
  • Years With Annual Returns Exceeding 10%: 2 for Adaptive Global vs 2 for S&P 500
  • Years With Maximum Monthly Drawdowns Exceeding 10%: 0 for Adaptive Global vs 1 for S&P 500
  • Standard Deviation Of Monthly Returns: 10.2% for Adaptive Global vs 19.0% for S&P 500
  • Up/Down Ratio Of Monthly Returns: 353% for Adaptive Global vs 249% for S&P 500

While Adaptive Global lagged the S&P 500 in absolute return for the two years, it did the job for which it was designed - provide very strong risk-adjusted returns. It backs that up with a 22 year history of significantly higher absolute and risk adjusted returns.

Adaptive Income

The bond market has had a challenging two years; particularly in view of the fact that the Fed has become the dominant player. The 10 year Treasury started 2020 at 1.87%, plummeted to a low of 0.54% in July, rose to 1.73% in March of 2021, and spent the remainder of 2021 trading in a range of 1.24% to 1.65%. The Merrill Lynch Option Volatility Estimate (MOVE) Index, often referred to as the VIX of bonds, has risen steadily across the two years.

The Adaptive Income strategy started 2020 with a full position in corporate high yield, reduced risk on February 1st (well before the crash began), maintained conservative positions through and post crash, then pivoted back to higher yielding funds. Finally, it began reducing risk exposure in late 2021 as the credit markets have begun to wobble.

  • January 2020: 100% high yield.  +0.8%
  • February-May 2020: 100% Treasuries and investment grade +1.9%
  • June-July 2020: 50%+- Treasuries and investment grade, 50% high yield +2.6%
  • August 2020-November 2021: high yield +11.2%
  • December 2021: cash

Municipal high yield accounted for 48% of returns, corporate high yield for 33%, and corporate investment grade for 16%.

Comparison: Tactical Adaptive Income versus the Vanguard Total Bond Market Index Fund, a domestic income fund which seeks to track the performance of a broad, market-weighted bond index. (The strategy was in cash for the blank month.)

Tactical Income exceeded both absolute and risk adjusted returns of the Vanguard Total Market Index Fund for both years. This is how they compared for the two years:

  • Compound Annual Growth Rate: 8.5% for Adaptive Income vs 2.6% for Vanguard Total Bond
  • Maximum Monthly Drawdown: 0.9% for Adaptive Income vs 4.2% for Vanguard Total Bond
  • Years With Annual Returns Exceeding 5%: 2 for Adaptive Income vs 1 for Vanguard Total Bond
  • Years With Maximum Monthly Drawdowns Exceeding 5%: 0 for Adaptive Income vs 0 for Vanguard Total Bond
  • Standard Deviation Of Monthly Returns: 3.1% for Adaptive Income vs 3.5% for Vanguard Total Bond
  • Up/Down Ratio Of Monthly Returns: 851% for Adaptive Income vs 163% for Vanguard Total Bond

Adaptive Innovation

Adaptive Innovation is designed for use as a niche strategy to provide exposure into the leading edge of innovation including big data and analytics, nanotechnology, genetics, medicine and biotechnology, networks, energy and environment, robotics, 3-D printing, bioinformatics, and distributed finance.

Innovation will continue in virtually any economic scenario you can envision!

(See our whitepaper: Tactical Adaptive Innovation)

I employ the term “niche” advisedly. Adaptive Innovation is a high return, high volatility strategy which some investors may find suitable for a 1% to 5% portion of a diversified tactical portfolio.

Birds Eye View: 2016 - 2021

The Adaptive Innovation strategy strongly outperformed the S&P 500 during its first 5 years with a CAGR of 28.6% and MaxDD of just 12.2%. Even with severe losses in 2021, the strategy managed to outperform both the CAGR and MaxDD of the S&P 500.

Comparison: Tactical Adaptive Innovation versus the S&P 500.

Close-up View: 2020 & 2021

The strategy severely underperformed the S&P 500 for the past two years in spite of handily outperforming the S&P 500 during the Covid bear market year of 2020.

Comparison: Tactical Adaptive Innovation versus the S&P 500.

So what happened? The Standard Deviation of the ARK funds used in the strategy soared from an average 24.7 for 2016-2020 to 32.5% for 2021 as the ARK funds underwent frequent and severe changes in direction. While the strategy managed to moderate the volatility to 21.6%, it could not escape it.

What are we going to do to fix it? There is a direct correlation between volatility and returns. In developing Adaptive Innovation, we accepted the trade-off of higher volatility for higher expected returns. We don’t tweak our strategies to optimize returns. Either the algorithms underlying the strategy are sound or we’ll scrap the strategy as we did recently with a Bitcoin based strategy.

The ARK funds did extremely well between their launch in 2014 and their discovery by the mo mo crowd  in 2020. The concept of researching and investing in the best of innovation companies is a long term winning strategy.

“Discovery” brought a big problem for the ARK ETFs. Unlike OEFs and CEFs, which can close to new money,, ETFs are created and destroyed based on ETF demand. Discovery forced creation of more and more ETF shares which required buying  more and more company shares, regardless of investment merit.

The more the air comes out, the closer the ARK funds get back to their roots. As the now mo mo sellers exit the funds, ETF shares are being destroyed and ARK is forced to sell the least worthy companies. I expect that performance of the ARK funds will materially improve as this process comes to an end.

Finally, recall that this is intended to be a niche strategy which some investors may find suitable for a 1% to 5% portion of a tactical portfolio.

Conclusion

The equity market has soared following the bear markets of 2007-2009 and March-April 2020 and is now priced for perfection. To further complicate matters, the equity and credit markets are facing significant new challenges.

Does this mean that investors should hide in cash? That would be a profound mistake because inflation will reduce the value of every dollar. Prudent investors are now casting a more discerning eye on risk while continuing to seek profit from market opportunities.

TAA offers investors a simple and mechanical approach to remain invested in the markets while significantly reducing both risk and time commitment. The TAAStrategies smoothly and effectively transition between risk on and risk off while delivering exceptional returns.

Tactical Adaptive Global provides broad exposure to domestic and international equities, fixed income, real estate, commodities and precious metals. Tactical Adaptive Global is intended for use as the primary strategy in a balanced tactical asset allocation portfolio. Read more about Tactical Adaptive Global in our whitepaper.

Tactical Adaptive Income provides conservative investors with a Fixed Income strategy which delivers outstanding returns, low drawdowns, and exceptionally low volatility. Read more about Tactical Adaptive Income in our whitepaper.

If you've ever been tempted to dip your investment toe into the leading edges of innovation but were put off by the high volatility; Tactical Adaptive Innovation may just fit the bill for a "big toe" portion of your portfolio. Read more about Tactical Adaptive Innovation in our whitepaper.

The TAAStrategies are available through three month and annual subscriptions with a 60-day unconditional money-back guarantee.

Thank you for reading!

 

Notes on tables for Adaptive Global and Adaptive Income:

Our results tables are constructed for three full market cycles beginning in January 2000.

The most recent market cycle covers January 2020 to date. Results for this market cycle are actual.

The second market cycle covers October 2007 through December 2019. The Adaptive Global and Adaptive Income strategies were developed using the first 10+- years of data from this cycle while the final years are actual.

The third market cycle covers January 2000 through September 2007. This market cycle was used to provide out of sample validation of strategy results from the second market cycle. The fact that the return and risk metrics for the third cycle are statistically comparable to those for the second cycle validates the process.

The fund baskets for our tactical strategies are constructed from indexed Exchange Traded Funds (ETFs) with just two exceptions, an Open End Fund and a Closed End Fund, both with long history. A number of the ETFs we use were not created until 2007+. In each case, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF.

We have been asked if it is possible to extend backtests to the 1970’s. While a few publishers attempt this; we believe it is not possible to produce credible results for all but the most basic TAA strategies due to the lack of funds with substantially similar indexing and/or classification. Doing so for the TAAStrategies would force me to stretch the term "substantial" far beyond my comfort level.

 

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Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Global. S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

Our results tables are constructed for three full market cycles beginning in January 2000.

The Adaptive Global table shows backtested results through July 2018 followed by actual results. More information is available in the blog article: The TAAStrategies, A Short History.

The most recent market cycle covers January 2020 to date.

The second market cycle covers October 2007 through December 2019. The Adaptive Global and Adaptive Income strategies were developed using the first 10+- years of data from this cycle while the final years are actual.

The third market cycle covers January 2000 through September 2007. This market cycle was used to provide out of sample validation of strategy results from the second market cycle. The fact that the return and risk metrics for the third cycle are statistically comparable to those for the second cycle validates the process.

The fund baskets for our tactical strategies are constructed from indexed Exchange Traded Funds (ETFs) with just two exceptions, an Open End Fund and a Closed End Fund, both with long history. A number of the ETFs we use were not created until 2007+. In each case, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF.

We have been asked if it is possible to extend backtests to the 1970’s. While a few publishers attempt this; we believe it is not possible to produce credible results for all but the most basic TAA strategies due to the lack of funds with substantially similar indexing and/or classification. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A blank month indicates that the strategy was in cash.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Income, S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

Our results tables are constructed for three full market cycles beginning in January 2000.

The Adaptive Income table shows backtested results through June 2019 followed by actual results. More information is available in the blog article: The TAAStrategies, A Short History.

The most recent market cycle covers January 2020 to date.

The second market cycle covers October 2007 through December 2019. The Adaptive Global and Adaptive Income strategies were developed using the first 10+- years of data from this cycle while the final years are actual.

The third market cycle covers January 2000 through September 2007. This market cycle was used to provide out of sample validation of strategy results from the second market cycle. The fact that the return and risk metrics for the third cycle are statistically comparable to those for the second cycle validates the process.

The fund baskets for our tactical strategies are constructed from indexed Exchange Traded Funds (ETFs) with just two exceptions, an Open End Fund and a Closed End Fund, both with long history. A number of the ETFs we use were not created until 2007+. In each case, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF.

We have been asked if it is possible to extend backtests to the 1970’s. While a few publishers attempt this; we believe it is not possible to produce credible results for all but the most basic TAA strategies due to the lack of funds with substantially similar indexing and/or classification. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A blank month indicates that the strategy was in cash.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Innovation, S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

The Innovation ETFs used in the Innovation Strategy were not established until 2014-2015 so our history is limited.

There are no predecessor funds which are similar enough to use for infill.

The Adaptive Innovation table shows backtested results through June 2019 followed by actual results. More information is available in the blog article: The TAAStrategies, A Short History.

A blank month indicates that the strategy was in cash.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)