Tactical Asset Allocation – May 2017

Strategy Update

Performance

The Global Core Tactical Asset Allocation Strategy finished May up 0.87% and up 5.38% year to date.

Domestic Equities, International Equities, Fixed Income and Precious Metals all contributed to this month's gains. The Core Strategy allocation shift from US Small and Mid Cap Equities into International turned out particularly well. As has been the norm, the volatility of our Core Strategy has remained well below the muted market volatility.

Market

If you were in big caps, the Info Tech sector, Europe, and Emerging Markets this month; the market rallied. If you were in mid caps, small caps, and most other sectors this month; the market declined. Fixed income gained a bit and collected dividends this month.

The Importance of Data

The Tactical Asset Allocation Model uses "dividend adjusted" historical closing data to insure that total return is calculated accurately. Early on, I satisfied myself that the data I was using was reasonably accurate; however I've long wanted some redundancy in sourcing the data used by the Model. As the saying goes "stuff happens".

A year or so ago, I sketched out plans to build a historical quote server which could pull data from multiple sources. I finally started on the project about six weeks ago. Accurate exchange closing prices are widely available although the format and consistency varies by vendor. Accurate "dividend adjusted" historical closing data requires adjusting (factoring) closing prices for dividends paid (and reinvested). This assures that funds in our baskets are accurately ranked during the selection process for total return.

While development was time-consuming, it was the dividend data which proved challenging. It also turned out that the subscription cost in no way reflects the quality of the data. I ended up with the ability to pull data from four sources; and while the sources generally agreed on the exchange close, none of them agreed on the "dividend adjusted" closing price. Getting to the root of the problem was an exercise in clerical patience during which I obtained the official dividend data from the fund providers and then compared it to the dividends used by the quote provider. The degree of sloppiness in some of the data was astounding!  Perhaps it is the sheer magnitude of dealing with thousands of symbols.

I ended up building a dividend history plant for the funds used in the Strategy fund baskets. This is used to insure that historical dividends are properly applied to historical exchange closing prices. The Tactical Asset Allocation Model now has redundant data sources and uses what I consider to be "perfect" dividend adjusted closing prices.

Consider that we use Market On Close orders to obtain execution at the same closing prices reported by the exchanges. There should be zero"slippage". Insuring that the dividends applied to our data match those which arrive in our account are another step in insuring that historical performance posted on the website reflects what is achievable for subscribers.

Earl Adamy

Tactical Asset Allocation Strategy Performance

Global Strategy (Conservative)

Month: 0.87% gain
Year-to-date: 5.39% gain
Full cycle-to-date (Sep 2007): 12.76% CAGR, 6.52% Max Monthly Drawdown

Global Strategy (Aggressive)

Month: 0.87% gain
Year-to-date: 5.39% gain
Full cycle-to-date (Sep 2007): 15.28% CAGR, 8.22% Max Monthly Drawdown

Tactical Asset Allocation Fund Basket Performance

Global Core

Month-to-date: 0.97% gain
Year-to-date: 4.47% gain
Full cycle-to-date (Sep 2007): 10.3121% CAGR, 6.52% 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% CAGR@Risk*, 8.22% Max Monthly Drawdown

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

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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)