Tactical Asset Allocation – March 2017

Performance

Global Core Tactical Asset Allocation Strategy finished February up 0.01% and up 3.47% year to date.

Both Equities and Fixed Income drifted slightly lower during March; however our blend earned us a sliver of out-performance.

Long Term Capital Gains

The Global Core Strategy started 2016 in cash and Fixed Income as the market was completing its first serious correction in 5 years. Equity indexes bottomed in early February and by the end of the month, Global Core shifted into Equities in time to catch most of this rally.

The Subscriber Tax Settings webpage  includes the following description of our portfolio adjustment process: "TAAS Strategies can maintain an ETF position for a long period while dynamically adjusting the share count up and down during the holding period. This effectively adds and trims shares at the outer edge of the position. We can optimize opportunities for Long Term Capital Gains in the core investment by treating the adjustments as short term trades." It goes on to point out that "“Last In, First Out” provides the best opportunity for the longest held shares to qualify for LTCG treatment".

A notice late last week from the broker holding our Tactical Asset Allocation portfolio alerted me that some holdings would be eligible for Long Term tax treatment on April Fool's day. The notice was no joke. Well over half of the portfolio holdings have been in place for a full year.

Market

Equity Market Valuations remain extreme - see our Historical Valuations webpage and the Advisor Perspectives Blog on market valuations. My general sense is that while there may still be a little gas left in the tank for this rally; the next major trending move will be down accompanied by a shift in Global Core from Equities to Fixed Income and/or cash.

Tactical Asset Allocation Strategy Performance

Global Strategy (Conservative)

Month-to-date: 0.01% gain
Year-to-date: 3.47% gain
Full cycle-to-date (Sep 2007): 12.81% CAGR, 6.53% Max Monthly Drawdown

Performance table (updated after the close each month)

Global Strategy (Aggressive)

Month-to-date: 0.01% gain
Year-to-date: 3.47% gain
Full cycle-to-date (Sep 2007): 15.30% CAGR, 8.21% Max Monthly Drawdown

Performance table (updated after the close each month)

Tactical Asset Allocation Fund Basket Performance

Global Core

Month-to-date: 0.01% gain
Year-to-date: 3.47% gain
Full cycle-to-date (Sep 2007): 10.29% CAGR, 6.53% Max Monthly Drawdown

Performance table (updated after the close each month)

Global Satellite

Month-to-date: hibernating since Nov 2014
Year-to-date: hibernating since Nov 2014
Full cycle-to-date (Sep 2007): 25.90% [email protected], 8.2% Max Monthly Drawdown

Performance table (updated after the close each month)

Other baskets

US Core

Month-to-date: 0.01% gain,
Year-to-date: 3.47% gain
Full cycle-to-date (Sep 2007): 10.44% CAGR, 7.13% Max Monthly Drawdown

Performance table (updated after the close each month)

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The table below shows performance for the Adaptive Global strategy through May.

Effective with the May 29 monthly rebalance, several of the ETFs have been shifted among the Favorable, Balanced, and Hostile market conditions. The strategy continues to use the same basket of ETFs, the same Adaptive Dynamic Momentum algorithm, the same selection algorithm, and the same weighting algorithm..The chart and table below reflect the changes.

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 backtest results tables are constructed for two full market cycles beginning in January 2000.

The most recent market cycle covers October 2007 to date. 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.

The earlier market cycle covers January 2000 through September 2007. A number of the ETFs we use were not created until later in the decade. For those cases, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF. Aside from providing insight into possible strategy performance during a second, earlier, cycle, they also offer the advantage of completely out of sample data. The fact that the metrics of both cycles are very comparable appears to validate the process.

We have been asked if it is possible to extend backtests to earlier decades. While this appears to be a common practice with some services; it is not possible to produce credible results for many strategies due to the lack of funds with substantially similar indexing and/or subclass. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

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 backtest results tables are constructed for two full market cycles beginning in January 2000.

The most recent market cycle covers October 2007 to date. 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.

The earlier market cycle covers January 2000 through September 2007. A number of the ETFs we use were not created until later in the decade. For those cases, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF. Aside from providing insight into possible strategy performance during a second, earlier, cycle, they also offer the advantage of completely out of sample data. The fact that the metrics of both cycles are very comparable appears to validate the process.

We have been asked if it is possible to extend backtests to earlier decades. While this appears to be a common practice with some services; it is not possible to produce credible results for many strategies due to the lack of funds with substantially similar indexing and/or subclass. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

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.

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)