We’ve added a major new feature to our members area: historical allocation analysis.
Every page begins with a simple pie chart like the one below showing the average asset allocation since inception. Throughout this post, I use Keller and Keuning’s excellent Generalized Protective Momentum (GPM) strategy as our example (we recently covered GPM on our blog). Hover over the chart for additional data.
If I were assessing this strategy, I might make observations like the following:
Note the strategy’s heavy reliance on US Treasuries. For those concerned about a future of rising interest rates, that may be cause for alarm and a reason to dig deeper. As discussed on our blog however, GPM has a mechanism to move to shorter duration instruments like cash when Treasuries underperform.
Also note GPM’s relatively low exposure to traditional risk assets like equities, and higher exposure to diversifying assets like gold and commodities. As also discussed on our blog, this is a result of GPM’s preference towards less positively correlated assets.
Average Allocation by Year
Next the analysis looks at average asset allocation by year. Here we see how each strategy responded to important market events like the 2000-02 Dot-Com Bust and 2007-09 Global Financial Crisis.
Again I’ve used GPM as our example, but I’ve also included a second chart for David Varadi’s Minimum Correlation. Note the obvious difference between a more active strategy like GPM and a relatively slower moving strategy like Min Corr. Hover over the chart for additional data, or click and drag the chart to zoom.
In the case of the more active GPM, note the multiple sharp increases in exposure to “safe” assets like Treasuries and cash during periods of market turmoil, including 2001, when the strategy spent the entire year in intermediate-term US Treasuries (IEF). It’s because of this aggressive use of defensive assets that the strategy has done such a good job protecting against losses. As mentioned previously, I would expect to see exposure to cash increase, and exposure to Treasuries decrease in an extended period of rising interest rates.
Average Allocation by Category by Year
With 14 assets to consider, the graph above of GPM’s allocation by year can be a little overwhelming, so the analysis also provides each strategy’s average allocation by category by year.
Here we combine assets into broad categories. For example, “International Equities” includes everything from Europe (VGK), Japan (EWJ) and emerging market (EEM) equities. Hover over the chart for additional data, or click and drag the chart to zoom.
By reducing the number of data series from 14 to 8, the chart is easier to digest. Note how this year, so far, has been an outlier in terms of the large (and risky) exposure to equities.
Recent Allocation Changes
Lastly, for the especially detail-oriented, we provide recent allocation changes in a tabular format. I’ll spare you an example as I think most readers find the summarizing charts much more useful and intuitive.
Members can find the new Historical Allocation page on the backtest for each of the 31 strategies that we track. Click the link in the backtest submenu that reads “Historical Allocation”.
In the coming months we plan to continue extending our backtests with additional subpages, including: rolling statistics (ex. rolling 3-year Sharpe Ratio), factor analysis, and advanced analytics like Monte Carlo simulations.
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