Tactical Asset Allocation – November 2016

US Core rebounded on strong US equities in spite of falling bond prices. When I started work on US Core in early 2015, I had first-hand experience with a number of TAA investment strategies, including managed accounts and my own first generation strategies, which either failed to deliver acceptable returns or incurred drawdowns beyond my comfort level. My major priorities in developing US Core were to limit drawdowns and improve returns.

It was one year ago on November 30 that I shifted our entire Tactical Asset Allocation investment (then, roughly 35% of our investment portfolio) into the US Core Strategy. The test of any investment strategy is sticking with it long enough to see how it fares under duress. While the past 12 months has not seen a Bear Market, it did see the largest market decline in four years. Here is how SPY, the S&P 500 ETF, and VBINX, the Vanguard Balanced Index Fund, stack up against US Core for the 12 months:

  • CAGR: SPY @ 7.85%, VBINX @ 5.80%, and US Core @ 6.46%
  • MaxDD: SPY @ 12.7%, VBINX @ 8.0%, and US Core @ 4.0%

US Core is clearly performing well in what has been a challenging market. Enough on what has gone well.

Global Core suffered under the weight of falling bond prices, reduced US equity exposure, and falling international equities. The sudden reversal in international markets, particularly emerging, was driven by the precipitous, post-election rise in both US interest rates and the US dollar.

Global Core's performance this month was a disappointment because it was a drag on overall portfolio results to the tune of a 3.3% negative differential to US Core. That differential turned what would have been a 2.06% gain in a 100% US Core portfolio into a 0.48% portfolio gain in my personal portfolio which held an equal weighted mix of US Core & Global Core.

Our backtested performance tables have always shown that US Core modestly outperforms Global Core in both CAGR and MaxDD; however I believe that the broader ETF basket is likely to provide improved opportunities in the future. I am going to devote my December research to finding adjustments which will make effective use of the broader ETF basket but with less volatility.

TLT, the 20 Year Treasury ETF, has now declined by 17% from its all time high in July (and is down another 1% as I write this). While the drop in Treasury prices reduced our Strategy returns, I am pleased that the decline occurred while equity prices are rising. Lower bond prices will provide more room for Treasuries to cushion a future decline in equities.

Equity valuations remain extremely high; however investors are showing few signs of concern. I will not hesitate to recommend a reduction in allocation to Tactical Asset Allocation strategies should I observe a significant deterioration in market conditions which is not being reflected in our Strategies.

We remain in conservative strategies which emphasize capital preservation over growth. Both Strategies are allocated entirely to US markets for December. The Core Strategy Models look for longer trends and tell us how to position the portfolio for the month ahead. We rebalance it and forget it until the next rebalance. Is it perfect? No. But over the long term it does better than most humans and does so with very little effort and relatively small drawdowns.


Global Core Strategy

Month-to-date: 1.24% loss,
Year-to-date: 3.77% gain
Full cycle-to-date (Sep 2007): 8.97% CAGR, 9.1% 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% MaxDD

Global Core + Global Satellite Strategy

Month-to-date: 1.24% loss,
Year-to-date: 3.77% gain
Full cycle-to-date (Sep 2007): 15.47% CAGR@Term, 13.22% MaxDD

US Core Strategy

Month-to-date: 2.06% gain,
Year-to-date: 6.58% gain
Full cycle-to-date (Sep 2007): 10.32% CAGR, 7.5%% MaxDD

Odds and Ends

Our personal funds remain fully invested in a blend of 20% Global Core and 80% US Core.


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