Tactical Asset Allocation – December 2016

2016 is in the books and what a wild year it was! We remained in our conservative Tactical Asset Allocation Core Strategies for the entire year which reigned in the volatility while providing decent returns. US Core is up 0.86% for December and 7.53% for the year ... nearly the same as the Vanguard Balanced Index Fund but with much lower drawdowns. The original Global Core is up 1.14% for December and 4.99% for the year.

The original Global Core benefited from a modest rise in US Equities. A 20%+- higher weighting in Small and Mid Caps provided extra return compared to US Core. Strategy returns were reduced by the continued sharp realignment of prices in the Treasury market. For 2017, the original Global Core has been replaced by the upgraded Global Core ... more on that below.

US Core also benefited from a modest rise in US Equities while maintaining a higher allocation to less volatile Big Caps. Strategy returns were reduced by the continued sharp realignment of prices in the Treasury market.

2016 is ending on a much better note than it started. Our Risk Model warned of "Hostile" market conditions at the end of November 2014 and remained in that state through year-end 2016. . Our Core Strategies went to cash on December 30, 2015  just in time to avoid the January/February correction in equities. Core Strategies took a liking to bonds for February and March then moved to equities in April and stayed there for the remainder of the year. Global Core also took a small position in precious metals for March through September and a November in (and then out) of International equities.

My mid-month blog post, "Upgrading Global Core", detailed my research and analysis of the original Global Core and the approach used to upgrade it. I excerpt  two key paragraphs:

"Another key to success in the financial markets is in quickly recognizing and correcting mistakes. In this case, a broader ETF basket is ideal but the combination of conditions which resulted in an over-sized allocation to riskier assets was not. My research objectives for fixing Global Core became quite simple: 1) maintain exposure to international and precious metals asset classes, 2) reduce the risk of that exposure, and 3) approximate the performance of US Core in both Compound Annual Growth Rate and Maximum Daily Drawdown.

As it turned out, the solution was rather simple. I put the original Global Core aside and began working toward “globalizing” the US Core. I also tightly controlled exposure to the additional funds. The results achieved all three objectives."

While the overall CAGR@Term of the upgraded Global Core is very close to US Core ( 10.18% vs 10.33%), we do see a 0.58% reduction in Maximum Daily Drawdown (7.48% to 6.90%) while reducing equity exposure by 0.11% and increasing alternative asset exposure from 0% to 1.71%.

The upgraded Global Core is an incremental improvement to US Core. I believe that the upgraded Global Core Strategy will better serve subscribers (including our personal portfolio) than US Core. The tax consequences of shifting holdings from US Core to the upgraded Global Core are not material.  Effective with the December 30 rebalance, I am moving all of our TAAS Strategy investments to the upgraded Global Core.

Speaking of taxes, a look at my year-end brokerage statement shows that 26% of our TAAS Strategy holdings have been held for one year or longer, and 92% have been held for at least nine months. This indicates a much lower than expected turnover rate in the TAAS portfolio. Given reasonably stable trends, the Strategies adjust at the edges rather than the core. Using a last-in, first-out (LIFO) tax lot selection works very well in maintaining low-turnover core positions.

Equity valuations remain extremely high; however investors are showing few signs of concern (per my Weekly Market Analyst blog). We remain in conservative strategies which emphasize capital preservation over growth.

TAAStrategies is undergoing a major upgrade. The email upgrade is already complete. An all new website will make its debut in mid to late January..

Tactical Asset Allocation Fund Basket Performance

Global Core Strategy (original)

Month-to-date: 1.14% gain,
Year-to-date: 4.99% gain
Full cycle-to-date (Sep 2007): 9.02% CAGR, 9.09% Max Daily Drawdown

This strategy has been replaced by the Upgraded Global Core Strategy:

Global Core Strategy (upgraded)

Month-to-date: 0.86% gain
Year-to-date: 7.72% gain
Full cycle-to-date (Sep 2007): 10.18% CAGR, 6.9% Max Daily Drawdown

Global Satellite Strategy

Month-to-date: hibernating since Nov 2014
Year-to-date: hibernating since Nov 2014
Full cycle-to-date (Sep 2007): 25.90% CAGR@Risk, 13.2% Max Daily Drawdown

US Core Strategy

Month-to-date: 0.86% gain,
Year-to-date: 7.53% gain
Full cycle-to-date (Sep 2007): 10.33% CAGR, 7.48% Max Daily Drawdown


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