Defensive Asset Allocation

Momentum Strategy

Defensive Asset Allocation

Defensive Asset Allocation is a core portfolio strategy appropriate for a large part of a portfolio. It is designed to participate in some of a bull market's gain while minimising (and occasionally even preventing) losses during bear markets.

The strategy rotates between six assets from three asset classes. The strategy holds the three assets with the strongest momentum at any given time.

As its name suggests, the Defensive Asset Allocation strategy is a defensive, low-volatility strategy that has generated impressive returns while demonstrating resilience during adverse market environments.

Defensive Asset Allocation is one of our earliest strategies. It is inspired by the Permanent Portfolio by late 1970s investment advisor Harry Browne. The main idea behind his approach is that economic conditions change over time, cycling unpredictably through extremes of prosperity, inflation, recession, and deflation. Each of these phases produces specific investment winners and losers. What performs well during a recession may well be the opposite during a recovery, and so on. Browne's solution was to divide a portfolio into four equal investments, each uncorrelated with the others. One fourth of the portfolio is allocated to equities, credit, gold and cash.

We have always liked the fundamental idea of the Permanent Portfolio. Still, we missed a mechanism that would rotate us in and out of those asset classes that perform best in the current economic environment. It was when Gary Antonacci published his award-winning research on momentum investing in 2012 that we had the courage and inspiration to experiment applying methods of momentum investing to the Permanent Portfolio. Soon enough, the Defensive Asset Allocation strategy was born!

Asset Allocation

The three modules and their assets are as follows:

Equity: US Stock Market
Equity: EAFE Markets (Europe, Australia, Far East)
Credit: US Treasury Bills (or cash-equivalent)
Credit: Long-term US Treasury Bonds
Phisical assets: US Real Estate
Phisical assets: Gold

The Permanent Portfolio’s biggest problem is it has no switching mechanism. Momentum investing methods help us to own only the asset classes showing momentum at that particular time, rather than owning all of them all the time. We calculate a momentum score with the total return of several short-term look-back periods to identify the three assets we wanted to be allocated to – or more importantly, the three we should avoid. Only assets with positive momentum will be considered, otherwise that portion is going into cash. This is a typical Dual Momentum application with absolute and relative momentum being considered.

Adding foreign equities and real estate to the original portfolio improved results further while minimising risk.

Strategy rules

At the close on the last trading day of the month, calculate the momentum score for each of the six asset classes.

Choose the three assets with the highest momentum score and allocate 1/3 of the portfolio to each asset. If one asset shows negative momentum, allocate that portion to cash. Hold until the last trading day of the following month.

Features

Rotate among three modules equities, credit and physical assets
Defensive strategy that reduces losses
Diversified across various asset classes with never more than 66% in one module. Never more than 33% in one asset class
Lower turnover, higher positive periods
Defensive Strategy that can lag market performance.

Equity Curve

Composite Dual Momentum

Metrics

Performance Summary

Statistic

Strategy

Benchmark

Annualised Return (CAGR)

9.94%

9.6%

Annualised Volatility

9.2%

9.5%

Max. Drawdown

-11.99%

-29.5%

Sharpe Ratio

0.86

0.64 Sortino Ratio

1.48

1.07 Statistic

Stragegy

Benchmark

Positive Periods

67.27%

65.4%

Best Year

26.75%

9.0%

Worst Year

-11.99%

-10.8%

Average Trade Per Year

11

0 Trade Frequency

Monthly

Static

Commentary

Harry Browne’s Permanent Portfolio was an answer to the eternal question about what the next few years will hold for the world, and more specifically, for the economy (and by extension, for the investment market). Will we see growth or a recession? Inflation or deflation?

In the past, planning for these outcomes and the impact each would have on specific types of assets was problematic. Our Defensive Asset Allocation strategy frees us from that difficulty, equipping us with a tool that often puts us in the right place at the right time. With a risk profile that suits cautious investors and a track record any investor can be excited about, Defensive Asset Allocation is a welcome solution.

The Defensive Asset Allocation strategy can safely be used in as much of your portfolio as you feel comfortable with. Given its superior performance and risk profile, the strategy can be used as a primary (or even sole) strategy. Defensive Asset Allocation is used in our balanced model portfolios.

Features

Rotate among three modules equities, credit and physical assets
Defensive strategy that reduces losses
Diversified across various asset classes with never more than 66% in one module. Never more than 33% in one asset class
Lower turnover, higher positive periods
Defensive Strategy that can lag market performance.

Featured Portfolios

Combining Our Strategies To Optimized Model Portfolios

Defensive Portfolio

More Resistant To Market Stress

Balanced Portfolio

Balanced for Risks and Opportunities

Offensive Portfolio

Exposure To Market Opportunities

Pioneering Investing Excellence: Unveil the Advantage of fundalytix.

fundalytix is not a trading platform or robo-advisor. fundalytix is somewhere in the middle in the best way possible. fundalytix is a small investment boutique with automated investing with a high level of customisation for its clients. Once we build your portfolio, our platform does the rest. This approach keeps cost down which results in higher growth and net returns.

Momentum Strategy