The offensive, defensive and canary universes are as follows:
Contrary to most of our other strategies, we implement the Dynamic Asset Allocation as it is promoted and intended by its original authors.
At the close on the last trading day of the month, measure the momentum of US Treasury Inflation-Protected Securities (TIPS).
If TIPS momentum is positive, select the four assets with the highest momentum from the offensive asset universe.
For each of those four assets, if momentum is positive, allocate 25% of the portfolio to the asset, otherwise allocate that portion of the portfolio to either US Intermediate-term Treasuries or cash, depending on which has the higher momentum.*
If TIPS momentum is negative, allocate the entire portfolio to either intermediate-term US Treasuries (IEF) or cash, depending on which has the highest momentum.*
All positions are executed at the close. Hold all positions until the last trading day of the following month.
*) This is what is known as “dual momentum”. The asset must exhibit both positive momentum (aka “time series momentum”) as well as high momentum relative to competing assets (aka “cross-sectional momentum”)
Keller and Keuning consider three universes in their novel strategy: the offensive one which includes ‘risky’ assets (like equities), a defensive universe with ‘cash’ assets (including bonds) and a third protective universe (or ‘canary universe’), which contains the assets that signals when to utilise the defensive universe for crash protection.
Their offensive universe consists of 8 assets with a top 4 selection according to their highest momentum. In general, the smaller the number of assets in the universe, the more aggressive and the less balanced the strategy will be. The top 4 approach out of a universe of 8 assets is a good compromise between a balanced and an aggressive allocation. Also, smaller universes will improve the effectiveness of absolute momentum based crash protection. The reason is that more than four assets with negative momentum will already trigger some assets to be replaced by cash. This allows the strategy to be in ‘fractional’ cash (e.g. if one or two out of the four offensive asset classes have negative momentum), even before the canary asset triggers a switch into protection mode using the defensive universe.
The offensive universe uses the four asset classes US, foreign equity, credit and real assets, with only two assets per class. This achieves a simple diversification at all times with no asset class having allocated more than two assets in the top 4. Furthermore, including long duration government bonds allows the strategy to rotate into high rate-sensitive assets during times of decreasing yields (as seen since the 1980’S and for the last 40 years).
The defensive universe holds a small universe of only two assets, cash and intermediate duration government bonds. Once the canary asset triggered the switch to the defensive universe, the strategy holds the asset with the best (say highest) momentum. This is a clever way to navigate an uncertain interest rate environment as the strategy automatically rotates into the most appropriate crash protective asset.
In their hybrid approach, Keller & Keuning use inflation-protected U.S. Treasury bonds as an early warning effect for rising inflation as a canary asset. In simple terms, if the momentum of inflation-protected U.S. Treasury bonds is negative, the strategy switches from the offensive to the defensive universe.
More Resistant To Market Stress
Balanced for Risks and Opportunities
Exposure To Market Opportunities
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.
