Six recent asset allocation articles (tactical or otherwise) that you might have missed:
1. Trend Following on Steroids (Wouter Keller via Alpha Architect)
Wouter Keller details his latest tactical model: “Defensive Asset Allocation”. We track a number of strategies from Dr. Keller and his partner-in-quant JW Keuning (including this one). It’s worth noting that their strategies are, overall, riding high and dry in defensive assets through this tumultuous month in the market, and are some of the top performing models that we track YTD.
2. What do portfolios and teacups have in common? (Newfound Research)
Corey really speaks our nerd language. Here Corey deep dives into the idea of diversifying not just across assets (the “what”), but across the trifecta of “what, how and when”. This is a challenge our site was specifically built to tackle (even if we didn’t know how to state it so eloquently).
Here’s a perfect example of the need to diversify across the “when”:
One of our top performing strategies this month has returned +5.2% MTD traded at month-end as originally designed. Had it instead executed on the first day of the month (i.e. the very next day), using the latest available data, it would be our worst performing strategy, down -13.3% (b/c it would have taken an entirely different position). There’s no reason to think that there’s so much magic in that month-end data point to justify that differential, or that the situation couldn’t be reversed. It’s largely “timing luck”. Fortunately, we can diversify away this risk with portfolio tranching.
3. Cash or Bonds at Low Yields and a Flat Yield Curve? (EconomPic)
While we think longer duration bonds might make more sense in TAA than buy and hold given the shorter hold periods and the ability to rotate away when bonds are underperforming, investors still need to understand the degree to which a TAA strategy has relied on bonds to generate returns (because the future is mathematically guaranteed to be inferior to the past). We model this exposure on a per strategy basis for members.
4. Portfolio Construction Through Handcrafting (Rob Carver)
Over the last few months, there has been a ton of amazing work published on portfolio optimization techniques (i.e. how best to allocate a portfolio among a given set of assets). See recent work from ReSolve and Newfound in particular (warning: therein lies hardcore quant nerd stuff).
Here, Rob discusses his more nuanced “handcrafting” approach to portfolio construction. It’s still quantitatively grounded, but designed to be more intuitive for the humans that actually apply these portfolios in the real world.
5. Is trend following dead? (Rob Carver)
I think that this question is as silly as Rob does. Trend-following is good for what it’s good for: managing losses and improving returns relative to risk (volatility, drawdowns, pick your poison). That last part shouldn’t be underestimated. In the real-world, short-term losses and volatility cause investors to take precisely the wrong action at precisely the wrong time (usually by selling low), and are a big reason why most investors underperform.
During periods of strong market performance, TF will tend to underperform because any allocation other than long risk to the gills is the wrong choice. We’ve seen that over the last couple of years (hence the ubiquitous “Is TF dead?” conversation). But during periods of market stress, TF will tend to outperform. We’re seeing that right now. Net-net, given enough time, TF has always won the race.
6. 12 Days of Christmas Podcasts (ReSolve Asset Mgmt)
From ReSolve: “We will explore, from first principles, timeless investment wisdom that will help you maximize your long-term success. From universe selection to portfolio construction, our aim is to offer you a comprehensive framework for a more thoughtful investment approach, for yourselves and your clients.”
I’m in the holiday crunch just like everyone else, so I haven’t had a chance to digest these in their entirety yet, but I will by the new year, and knowing the quality of ReSolve’s work I know they’ll be worth the listen.
Other recent links that you might have missed:
- Interview with Adam Buler of ReSolve Asset Mgmt (Better System Trader)
- Understanding the Correlation of Equity and Bond Returns (SR and SV)
- Directionally Right and Precisely Wrong (Newfound Research)
- Maximizing Diversification (Newfound Research)
- The Risk in the Risk-Free Rate (Newfound Research)
- How to Use Trend Following Within a Portfolio (Alpha Architect)
- A Proxy for the Unobservable Global Market Portfolio (Alpha Architect)
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