Dr. Keller and his Bold Asset Allocation
A recent tactical asset allocation strategy from a proficient creator
Meet Dr. Wouter J. Keller, a trailblazing creator of tactical asset allocation strategies, with his tradition of unveiling a new one every year that dates back to around 2013. Bard explains Tactical Asset Allocation (TAA) as below:
Tactical asset allocation (TAA) is an active investment management strategy that seeks to improve the risk-adjusted returns of a portfolio by overweighting and underweighting asset classes and sectors based on short-term market forecasts. TAA managers use a variety of technical and fundamental analysis tools to identify investment opportunities and risks.
TAA is different from strategic asset allocation, which is a long-term investment strategy that is based on an investor's individual risk tolerance and financial goals. Strategic asset allocation typically involves setting target allocations for different asset classes, such as stocks, bonds, and cash, and rebalancing the portfolio regularly to maintain those allocations.
TAA managers may make more frequent changes to their portfolios than strategic asset allocation managers, and they may take more concentrated bets on certain asset classes or sectors. This makes TAA a riskier strategy, but it also has the potential to generate higher returns if the manager's forecasts are accurate.
Dr. Keller has left his mark on the investment world by introducing useful concepts and tools, such as canary signals and momentum indicators. One of his latest creations, Bold Asset Allocation (BAA), has stirred some excitement for me with its promising backtest performance. It's a monthly rebalancing strategy that hinges on two momentum indicators and three distinct asset universes.
Zooming in on Momentum Indicators
BAA relies on two momentum signals: 13612W and SMA12. The former gauges an asset's momentum over a year by considering 1-month, 3-month, 6-month, and 12-month returns, weighing recent returns more heavily to deliver a quicker signal:
Where Pn is the price n months ago. The latter offers a slower relative momentum signal over the same time-frame:
The Triad of Asset Universes
Canary Universe: Here, we're looking at SPY, EFA, EEM, and AGG ETFs, representing the S&P 500, developed markets, emerging markets, and US bonds. When all the canaries (read: 13612W momentums) sing in harmony (read: are positive), it's go-time for BAA.
Offensive Universe: Think canary universe, but swap out SPY for QQQ, the Nasdaq 100 ETF. This is where we gear up for some high-octane action.
Defensive Universe: A lineup of seven assets ready to shield and defend - Treasury Inflation-Protected Securities (TIP), commodities (DBC), US Treasury bills (BIL), intermediate-term US Treasuries (IEF), long-term US Treasuries (TLT), US corporate bonds (LQD), and US aggregate bonds (AGG). It’s where BAA goes to regroup when things get dicey.
Once the canaries signal the all-clear, BAA dives into the offensive using the SMA12 signal to cherry-pick the asset with the most potent momentum from its universe. In defense mode, it does a similar drill but with the top three assets. The catch? If any of these assets show less mojo than good ol' BIL (a cash equivalent), they're subbed out.
The original paper and this article can be good references for a further research.
QuantMage Decodes BAA
QuantMage can faithfully replicate BAA's logic, supporting both momentum indicators:
For the defensive part, to implement the absolute momentum fallback, three BILs are added to the “Filtered” section. These serve as potential fallback when any of the three selected assets among the original seven exhibits weaker momentum than BIL.
So, how does BAA fare in QuantMage’s backtesting?
From June 2008, it’s flaunting an annual return of 9.9% with a maximum drawdown of 16.6%. Now, those are some numbers worth noticing, especially when pitted against the good old buy-and-hold with SPY. Keep in mind that the numbers may differ from the original paper due to differences in backtesting periods, monthly versus daily max drawdowns, and precise rebalancing timings.
Hungry for more? Check out the strategy in its full glory here. And for those who fancy a bit of equilibrium, there’s a balanced version too, which uses more diversified offensive universe. Give it a whirl!
Closing Thoughts
The BAA is undoubtedly intriguing. But as with all strategies, it begs the question: Is this a star performer or an overfit? Dive in, explore, and let me know your thoughts!
Remember, in the ever-twisting dance of investment, it's all about finding the rhythm that suits you best. Until next time, keep dancing with those numbers! 🕺💼📈
As usual, the content here is purely informational. It’s not investment advice, nor a recommendation to buy or sell any stocks. Always do your own research and consider chatting with a financial pro before making any investment moves.