Tactical Asset Allocation – July 2017

Tactical Asset Allocation Strategy Update

Performance

Global Core is up 1.35% MTD and up 7.35% YTD

Domestic US Big Cap did 80% of the lifting this month while our smaller positions in International, Emerging Markets, and Treasuries contributed the other 20%.

Market

Equity markets were up globally this month with International Developed and Emerging Markets out-performing the US. Strength in the US market has been highly concentrated in a handful of wildly popular "can't miss" stocks. Mid and Small Cap stocks lagged. The fixed income market moved sideways.

Upgraded Market Risk Model

This Bull Market is going to come to an end, sooner or later. It will die on its own excesses or on withdrawal of liquidity from Central Banks.

I have devoted considerable time and effort to researching the characteristics of Bear Markets with an eye to enhancing the Market Risk Model.

I created the Market Risk Model two years ago to identify favorable risk conditions under which our Global Satellite Strategy should be deployed to deliver high returns without incurring excessive risk. The efficacy of this approach is demonstrated by results which have delivered returns nearly double that of the Global Core Strategy during Favorable risk conditions which exist during roughly 50% of a full Market Cycle.

I am introducing an upgraded Market Risk Model which signals three risk conditions: Favorable, Balanced, and Hostile:

  • Favorable: strong market with little risk of major decline, suitable for Satellite Strategy
  • Balanced: risks of decline and opportunity for advance is roughly equal, suitable for Core Strategy (primarily equities)
  • Hostile: high risk of extended market decline and large drawdowns, suitable for Core Strategy (primarily fixed income)

Understand that we are measuring probabilities here, not certainty. Favorable does not come with a guarantee of a Bull Market nor does Hostile come with a guarantee of a Bear Market.

The upgraded Market Risk Model combined with the Core and Satellite Strategies have been very effective in far out-performing the S&P 500 during every market condition as well as over a full cycle.

I am in the process of writing a Featured Article covering the Market Risk Model complete with graphics showing historical and market condition segmented performance. I am also putting the finishing touches on a new Global Satellite (Hostile) Strategy which delivers significant additional full cycle performance.

Earl Adamy

Tactical Asset Allocation Strategy Performance

Global Strategy (Conservative)

Month: 1.35% gain
Year-to-date: 7.35% gain
Full cycle-to-date (Sep 2007): 13.21% CAGR, 6.53% Max Monthly Drawdown

Global Strategy (Aggressive)

Month: 1.35% gain
Year-to-date: 7.35% gain
Full cycle-to-date (Sep 2007): 16.61% CAGR, 8.22% Max Monthly Drawdown

Tactical Asset Allocation Fund Basket Performance

Global Core

Month-to-date: 1.35% gain
Year-to-date: 7.35% gain
Full cycle-to-date (Sep 2007): 10.24% CAGR, 6.53% Max Monthly Drawdown

Global Satellite

Month-to-date: hibernating since Nov 2014
Year-to-date: hibernating since Nov 2014
Full cycle-to-date (Sep 2007): 26.87% CAGR@Risk*, 8.22% Max Monthly Drawdown

*CAGR for the "Favorable" Market Conditions during which Global Satellite was invested

Ready to learn More about the Strategies?

Exceptional results are due entirely to the complementary strengths of our Market Conditions Model and our Tactical Model.

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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)