Tactical Asset Allocation – October 2017

Tactical Asset Allocation Strategy Update

Performance

Global Core is up 0.67% for October and up 9.48% YTD

Big cap domestic has been the major contributor this month with small assists from domestic small cap and emerging markets. Treasuries have declined modestly.

Market

This market has been nothing short of amazing in its ability to rally, interrupted only by the smallest of corrections. While the FANGs are reaping the largest share of the gains, the rest of the equity market is doing a decent job of riding their coattails. Sector rotation has been continuous as each plays catch-up when left behind.

Yields on longer dated Treasuries have strengthened and appear headed higher. While this creates a small drag on our Core Strategy, it will provide more opportunity for returns when the Market Conditions Model recommends shifting some funds into Global Satellite (Hostile).

Earl Adamy

Tactical Asset Allocation Strategy Performance

Global Strategy (Conservative)

Month: 0.67% gain
Year-to-date: 9.48% gain
Full cycle-to-date (Sep 2007): 13.72% CAGR, 7.14% Max Monthly Drawdown

Global Strategy (Aggressive)

Month: 0.67% gain
Year-to-date: 9.48% gain
Full cycle-to-date (Sep 2007): 17.24% CAGR, 8.22% Max Monthly Drawdown

Tactical Asset Allocation Fund Basket Performance

Global Core

Month-to-date: 0.67% gain
Year-to-date: 9.48% gain
Full cycle-to-date (Sep 2007): 10.18% CAGR, 6.54% Max Monthly Drawdown

Global Satellite (includes Favorable & Hostile)

Month-to-date: hibernating since Jul 2016
Year-to-date: hibernating since Jul 2016
Full cycle-to-date (Sep 2007): 21.93% [email protected]*, 8.21% Max Monthly Drawdown

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

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3 thoughts on “Tactical Asset Allocation – October 2017”

  1. Thanks Earl. I’m probably missing something, or forgetting, but my understanding is that the satellite basket would never be employed during hostile market conditions, yet the full cycle [email protected] above reports exactly that. My guess is that there nay be brief overlap periods where this occurs, but would appreciate your response. Thank you, as always.

    • That is exactly where we were a year ago; however I was very frustrated with the prospect of missing returns during a strongly trending decline. It took me two years of testing strategies before I found a low-risk, high return strategy for Bear Markets. Once I had the strategy in hand, I needed to upgrade the Market Conditions Model to signal when the strategy was to be deployed. We now have Global Core and two satellite strategies: Global Satellite (Favorable) and Global Satellite (Hostile). If you’ll go to the Strategies page, scroll down to #2 Basket Selection, and have a look at the Global Satellite column, you’ll find a summary with a chart and 3 tables showing performance combined and individually.

  2. Yes, now I remember. I had forgotten about the Hostile Satellite basket, so misunderstood, thinking you were referring to the same basket for both conditions. Thanks.

Comments are closed.

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)