Tactical Asset Allocation – October 2016

Thank goodness, Halloween is behind us! As the old saw goes "past performance is no guarantee of future performance" but we are now entering what is seasonally the best three months for equity investment returns.

The past three months have been full of increasing uncertainty which managed to put a dent in our returns for October. The most noteworthy characteristic of market action which affected our Strategies during October was concurrent weakness in both equities and mid-duration Treasuries. Such behavior is most likely to occur when both bond and equity markets carry elevated valuations; however it is unlikely to occur when equities are in a strong decline.

The Market Bears have been growling about a major decline for a couple of years now ... beginning around the same time (November 2014)  that our Market Risk Model identified market conditions as "Hostile". But for us, Hostile does not mean a Bear Market is at hand. It means that risks have shifted and we should move to a conservative "Core Strategy" which emphasizes capital preservation over growth.

We've managed to make money this year while keeping our heads down. It can sometimes be tempting to simply move the portfolio to cash; however we never know when cash will lead to missed opportunities. When we performed the Rebalance at the end of May, who knew we were in for strong months in June and July? We also managed to weather the January/February swoon a few bucks to the good.

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.

Investor tolerance for risk is a critical component of the TAAS Risk Model as well as for the general market analysis I do each week. Investor flight to safety is one of the critical markers of an impending Bear Market; however I have been observing that investors remain relatively complacent considering the news cycle. While this can always change, the general market action we have experienced during the past three months has been constructively corrective rather than Bearish.

As we approach each Rebalance, I take a close look at the trends and condition of the funds in our strategy baskets. While fund trends were stronger a few months ago, they continue to warrant our investment. 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.


Global Core Strategy

Month-to-date: 2.21% loss,
Year-to-date: 5.07% gain
Full cycle-to-date (Sep 2007): 9.20% 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): 26.24% [email protected], 13.2% Max Daily Drawdown

Global Core + Global Satellite Strategy

Month-to-date: 2.21% loss,
Year-to-date: 5.07% gain
Full cycle-to-date (Sep 2007): 15.78% [email protected], 13.22% Max Daily Drawdown

US Core Strategy

Month-to-date: 2.27% loss,
Year-to-date: 4.43% gain
Full cycle-to-date (Sep 2007): 10.17% CAGR, 7.5%% Max Daily Drawdown

Odds and Ends

Our personal funds remain fully invested in a blend of 50% Global Core and 50% US Core. Continued use of the US Core is based on tax preferences.

My focus is shifting to the combination of Global Core + Global Satellite. When paired with a Satellite Strategy for full cycle returns, Global Core + Global Satellite outperforms US Core + Global Satellite by a CAGR of 1.77%.

While the historical CAGR for US Core on its own is slightly higher than Global Core, Global Core has a more diversified fund basket which has served us well this year and should continue to do so in the coming years.

The website has been undergoing a bit of a makeover as I continue to monitor and research the integration of the Core and Satellite Strategies with the Risk Model. I have completely re-written the Strategies page and I think it does a much better job of explaining the role and importance of both Core and Satellite Strategies. There is a pronounced shift in emphasis on the website to the integration of Global Core and Global Satellite.


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2 thoughts on “Tactical Asset Allocation – October 2016”

  1. I’m thinking about building toward 100% Global Core, but also weighing maintaining my 50/50 split with US Core, but shifting to 50/50 Global Core/Global Satellite when conditions are no longer hostile. Any drawbacks to that approach you can think of? Thanks Earl.

    • I have a strong preference for Global Core versus US Core simply because the basket is broader and I expect more opportunity from it. That said, I have gains in US Core which stand a decent chance of going Long Term if I stay put. On the other hand, I have rarely found it wise to allow tax strategies to guide investing. I decided to sit tight at 50/50 for November while I give the shift more thoughtful consideration.

      I do think that Global Core and Global Satellite pair well and as sun follows rain, we will once again see the day where we have Favorable market conditions. I think the percentage shift should be constrained by drawdown tolerance. Global Satellite MaxDD shows 13%+- on the full cycle so one going 100% Satellite should be prepared for 13%+- with a margin of error of 20% to 30% … say 13%+- to 17%+-. If that is beyond one’s comfort zone (it is probably beyond mine), a 50% allocation would allow for 6.5% to 8.5% MaxDD which is more in line with the MaxDD of Global Core plus one should still expect a much higher return.

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