Tactical Asset Allocation – June 2017

Tactical Asset Allocation Strategy Update

Performance

The Global Core Strategy finished May up 0.51% and up 5.92% year to date.

Domestic Big Cap gave us a modest boost this month while Treasuries were a bit of a drag and International went sideways. June was a big month for dividends.

Market

Up, down, up, down. June was the tightest monthly trading range in the past several years at just 1.99% from high to low. While June was pretty much trendless, there is clearly some unease creeping into the market. The big news appears to be a shift in Central Banker attitudes toward reducing holdings. When Central Bankers were buying bonds (and in some countries, equities), the purchases were funneling cash into the markets. Whether Central Bankers allow their bond holdings to run off as they mature or liquidate holdings, cash will be removed from the markets.

Outlook

My money is right here in the TAAS Global Strategy alongside my subscribers. I believe the Global Strategy to be among the best and safest investments available; however nothing in the markets is perfect. I also know that if I'm concerned about the state of the markets, my subscribers are too. So let's jump in.

Generally, I like to buy Equities when they are cheap, hold them while PE multiples expand, and sell them when PE multiples are expensive. I like to own Fixed Income when Equities are expensive and while PE multiples are declining (aka Corrections and Bear Markets), and sell them when Equities are cheap. The Market Risk Model does a good job of assessing risks in the equity market and our Tactical Asset Allocation strategies pretty much mirror this cyclical approach while adjusting allocations opportunistically to intermediate changes in trend.

In the February 28 Rebalance Notice, I shared my concerns regarding the extremely high level of Equity valuations. At that time Market Value divided by GDP closed above 130% and I moved 1/3 of our personal allocation to the TAAS Portfolio into cash. In doing so, I knew that I might forgo some gains but felt that was the right thing to do for our personal portfolios and for our peace of mind. That decision has resulted in our personal returns being roughly 0.75% below the Global Strategy returns. I still feel that was the right decision for us.

As we close out June, Market Value divided by GDP is closing just under 133% and the underlying health of the Equity market is showing some signs of deterioration. This gives me some concern; however this is pretty much what I anticipated when I moved 1/3 of our allocation to cash. I am standing pat with 2/3 of the allocation invested in the Global Strategy. However I am monitoring the situation closely and will share with subscribers any changes in my outlook.

Before closing, I want to say a few words about Fixed Income. High Quality (Investment Grade and Treasury) Fixed Income is historically the "safe haven" when Equities are extremely expensive or PE's are declining. Although rising yields are currently giving Equities some heartburn, I am comfortable, even enthusiastic, about rising Fixed Income yields.

Why? When Equities begin rolling over, the Global Strategies will move into Fixed Income or cash. High yields (lower prices) will make Fixed Income more attractive than cash and that should make us some money.

Earl Adamy

Tactical Asset Allocation Strategy Performance

Global Strategy (Conservative)

Month: 0.51% gain
Year-to-date: 5.92% gain
Full cycle-to-date (Sep 2007): 12.69% CAGR, 6.52% Max Monthly Drawdown

Global Strategy (Aggressive)

Month: 0.51% gain
Year-to-date: 5.92% gain
Full cycle-to-date (Sep 2007): 15.21% CAGR, 8.22% Max Monthly Drawdown

Tactical Asset Allocation Fund Basket Performance

Global Core

Month-to-date: 0.51% gain
Year-to-date: 5.92% gain
Full cycle-to-date (Sep 2007): 10.18% 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): 25.94% [email protected]*, 8.22% Max Monthly Drawdown

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

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I will be rolling out upgrades to the Tactical Model and Adaptive Strategies beginning with the November 29 rebalance for the month of December. In each case, the focus has been on improving control over the upper bounds of portfolio volatility, improving the consistency of annual returns, and on reducing fund turnover.

In order to provide the fullest possible disclosure, the Chart and Table displays on the website will include tables for both the original (labeled “Repl Dec 2019)” and upgraded Strategy beginning with the next update in early December.

The primary benefit of minor changes to Adaptive Global is reduction in both Standard Deviation of Monthly Returns and the Ulcer Index:.

  • Fund basket and condition eligibility: no change was made to fund baskets or condition eligibility
  • Fund selection: no change to fund selection method (Adaptive Dynamic Momentum)
  • Weighting of selected funds: Volatility Weighting was replaced with Limited Portfolio Volatility Weighting which is employed to cap the expected total portfolio volatility when high volatility funds (especially equities) are used. This slightly reduces both risk and return.
  • Position Optimization: Upgraded which slightly improves holding periods and performance.

Full cycle: CAGR decreased slightly from 15.0% to 14.6%;  Max Monthly Drawdown declined from 8.7% to 7.9%; and the Up/Down Ratio decreased slightly from 228.7% to 228.4%. The Ulcer Index declined from 3.7% to 3.6% and Standard Deviation of Monthly Returns declined from 9.5% to 9.1% reflecting improved consistency of returns.

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.

I will be rolling out upgrades to the Tactical Model and Adaptive Strategies beginning with the November 29 rebalance for the month of December. In each case, the focus has been on improving control over the upper bounds of portfolio volatility, improving the consistency of annual returns, and on reducing fund turnover.

In order to provide the fullest possible disclosure, the Chart and Table displays on the website will include tables for both the original (labeled “Repl Dec 2019)” and upgraded Strategy beginning with the next update in early December.

The primary benefit of changes to Adaptive Income is a broadening of the fund basket and reduction in both Standard Deviation of Monthly Returns and the Ulcer Index:

  • Fund basket and condition eligibility: the number of fixed income ETFs was increased from 5 to 6 to broaden the basket to include an investment grade ETF.
  • Fund selection: no change to fund selection method (Adaptive Dynamic Momentum)
  • Weighting of selected funds: Adaptive Income employed a single selection, 100% weighting to the best performing fund. Limited Portfolio Volatility Weighting is employed to cap the expected total portfolio volatility when higher volatility funds (especially high yield) are used. This forces the allocation across a second, lower volatility fund when the cap is exceeded.
  • Position Optimization: Upgraded which slightly improves holding periods and performance.
  • Full Cycle: CAGR increased slightly from 10.6% to 11.1%; Max Monthly Drawdown increased from 2.9% to 3.8% however Max Daily Drawdown remains unchanged at 7.1%; and the Up/Down Ratio rose from 503.0% to 556.9%. The Ulcer Index declined from 1.3% to 1.2% and Standard Deviation of Monthly Returns declined from 5.6% to 5.1% reflecting improved consistency of returns.

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.

 

I will be rolling out upgrades to the Tactical Model and Adaptive Strategies beginning with the November 29 rebalance for the month of December. In each case, the focus has been on improving control over the upper bounds of portfolio volatility, improving the consistency of annual returns, and on reducing fund turnover.

In order to provide the fullest possible disclosure, the Chart and Table displays on the website will include tables for both the original (labeled “Repl Dec 2019)” and upgraded Strategy beginning with the next update in early December.

This upgrade to Adaptive Innovation improves performance while significantly reducing volatility.

  • Fund basket and condition eligibility: The existing long duration Treasury ETF was added to the eligible funds for Balanced conditions. This allows strongly performing Treasuries to complete effectively with the Innovation equities for selection. A short duration Treasury ETF was added to provide a higher yielding alternative to cash.
  • Fund selection: no change to fund selection method (Adaptive Dynamic Momentum)
  • Weighting of selected funds: Volatility Weighting was replaced with Limited Portfolio Volatility Weighting which is employed to cap the expected total portfolio volatility when the higher volatility Innovation funds are used. This forces the allocation across a second or third fund when the volatility of the primary fund(s) exceeds the cap.
  • Position Optimization: Upgraded which made no change in holding periods and performance.
  • Partial cycle: CAGR increased slightly from 26.3% to 28.4%,  Max Monthly Drawdown and Maximum Daily Drawdown remained unchanged at 12.2% and 19.2% respectively; and the Up/Down Ratio increased from 280.2% to 336.9%. The Ulcer Index declined from 5.6% to 5.1% and Standard Deviation of Monthly Returns declined from 15.7% to 14.9% reflecting improved consistency of returns.

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.