SCV+Momemtum Permanent Portfolio

[InsuranceGuy]

[deleted]

[MachineGhost]

Thanks for sharing.  We're always interested in real world, walk forward tests of factors as it pertains to enhancing the PP.

But I've got to wonder, why are your HBPP returns so low?  The "official" backtester at http://www.peaktotrough.com/hbpp.cgi shows 9.3% CAGR between 1973-2004 and 7.01% CAGR between 2006-2015.

[InsuranceGuy]

[deleted]

[MachineGhost]

1973-2004 test period nominal returns
HB:.................. CAGR 9.3%, StDev 8.6%, MaxSYDD* -6.1%
HB+MOM:........ CAGR 11.0%, StDev 12.9%, MaxSYDD* -13.5%
HB+MOM+SCV: CAGR 13.4%, StDev 12.7%, MaxSYDD* -2.1%

2006-2015 invested nominal returns
HB:.................. CAGR 6.9%, StDev 6.1%, MaxSYDD* -2.8%
HB+MOM:........ CAGR 7.4%, StDev 7.5%, MaxSYDD* -3.5%
HB+MOM+SCV: CAGR 9.3%, StDev 8.1%, MaxSYDD* -2.3%

So tell us some more about what you're doing exactly.  Are you using only relative momemtum and no absolute momentum or both?  What specific indexes did you use for the backtest between 1973-2004?

In my backtesting, I've found that buying the top three when positive outperform only buying the top one or top two, oddly.  It doesn't make too much sense but I haven't dug deeper.

[InsuranceGuy]

[deleted]

[MachineGhost]

I am using a variation of dual momentum, so relative momentum with the condition that if an asset class did not outperform the "cash" returns then its allocation would be moved to cash.

Isn't that technically Dual Momentum?  Antonacci subtracts the cash return from the absolute momentum return before doing the relative momentum ranking with the results.  There should be no difference between including cash in the ranking vs subtracting it from the momentum, right?

Nonetheless, I'm intrigued at the returns you've presented so I will work on backtesting this to see what the real deal is.

[InsuranceGuy]

[deleted]

[MachineGhost]

I've got some tentative stats for the top 2.

From 1973 to 2004 using your rules, I come up with 11.31% CAGR and -23.13% MaxDD; all dates 9.98% CAGR and -23.74% MaxDD.  So this looks promising compared to the regular PP at 9.05% CAGR and -15.44% MaxDD; all dates 8.20% CAGR and -15.85% MaxDD.

Any particular reason why you settled on a 40%/60% split?

[InsuranceGuy]

[deleted]

[MachineGhost]

What data did you use?  I only ask as I get 13.4% using my rules on the portfolio visualizer 1973-2004 Large Cap Blend, Small Cap Value, Long Term Bond, Short Term Treasuries, and Gold returns.

My reasoning on the 40/60 was that I wanted a significant part of my portfolio to be buy and hold in case the momentum alpha disappeared.  I assumed going into this that top 2 would work the best and then picked 40/30/30 over 30/35/35.

This was just the S&P 500, T-Bonds, Gold and T-Bills (10% each + 30% top 2 kicker).  I don't have data on equity tilting to go back far enough for that, but we know they will juice the returns anyway hopefully with little to no increase in risk.

I'm skeptical about Small Cap Value as I've mentioned elsewhere on the forum.  But in the 70's I recall that small companies steamrolled after the Nifty 50 Mega Cap debacle so it was similar to what they did after the dot.com Mega Cap bubble, i.e. reversion to the mean.  But obviously, they're no longer value nor small anymore, so any reversion to the mean will eventually be to the downside and a drag on returns.  A much better approach is to just have equal exposure to all size, value and growth factors and be completely agnostic about expecting the past to repeat in keeping with the PP philosophy of not predicting the future.

On the other hand, for relative momentum purposes, I think splitting the factors by value / growth x size might make a lot more sense than a blob agglomeration.

[stuper1]

This strategy to me is very intriguing.  I almost find it to sound too good to be true.  If I'm reading this right, you're saying that we might get a 2 - 3 % increase in real CAGR over the HBPP and keep the maximum single year drawdown at about the same level or even lower.  Is that correct?  Am I reading this right?  I'd be interested to see what the backtested rolling 5-year real returns are.  How can I backtest this?  Thanks!

[InsuranceGuy]

[deleted]

[InsuranceGuy]

[deleted]

[MachineGhost]

Here's my final results on the four asset HBPP.  I have noticed an interesting conundrum in that using the 3-month T-Bill yield for dynamic interest for uninvested cash outperforms by about .40% CAGR vs investing in a 1-year total return T-Bill.

1968-2015 (Annual Rebalance, Relative Momentum Only)
====================================
(100% buy and hold)
HBPP............................................7.57% CAGR, -19.60% MaxDD
Correlated Risk Parity PP (No Cash)..8.89% CAGR, -24.59% MaxDD

(90% buy and hold, 10% top momentum)
HBPP + Top 1 Momo......................8.20% CAGR, -21.80% MaxDD
HBPP + Top 2 Momo......................7.92% CAGR, -20.29% MaxDD
HBPP + Top 3 Momo......................7.75% CAGR, -19.41% MaxDD

(80% buy and hold, 20% top momentum)
HBPP + Top 1 Momo......................8.82% CAGR, -24.73% MaxDD
HBPP + Top 2 Momo......................8.26% CAGR, -20.70% MaxDD
HBPP + Top 3 Momo......................7.94% CAGR, -18.96% MaxDD

(70% buy and hold, 30% top momentum)
HBPP + Top 1 Momo......................9.40% CAGR, -27.62% MaxDD
HBPP + Top 2 Momo......................8.58% CAGR, -21.67% MaxDD
HBPP + Top 3 Momo......................8.12% CAGR, -19.32% MaxDD

(60% buy and hold, 40% top momentum)
HBPP + Top 1 Momo......................9.95% CAGR, -30.12% MaxDD
HBPP + Top 2 Momo......................8.89% CAGR, -23.06% MaxDD
HBPP + Top 3 Momo......................8.30% CAGR, -19.66% MaxDD

(50% buy and hold, 50% top momentum)
HBPP + Top 1 Momo.....................10.47% CAGR, -32.74% MaxDD
HBPP + Top 2 Momo......................9.22% CAGR, -24.18% MaxDD
HBPP + Top 3 Momo......................8.50% CAGR, -19.86% MaxDD

(40% buy and hold, 60% top momentum)
HBPP + Top 1 Momo.....................10.26% CAGR, -31.10% MaxDD
HBPP + Top 2 Momo......................9.01% CAGR, -21.91% MaxDD
HBPP + Top 3 Momo......................8.67% CAGR, -20.18% MaxDD

(30% buy and hold, 70% top momentum)
HBPP + Top 1 Momo.....................11.43% CAGR, -37.47% MaxDD
HBPP + Top 2 Momo......................9.87% CAGR, -25.84% MaxDD
HBPP + Top 3 Momo......................8.86% CAGR, -20.44% MaxDD

(20% buy and hold, 80% top momentum)
HBPP + Top 1 Momo.....................11.87% CAGR, -39.61% MaxDD
HBPP + Top 2 Momo.....................10.16% CAGR, -25.05% MaxDD
HBPP + Top 3 Momo......................9.02% CAGR, -20.71% MaxDD

(10% buy and hold, 90% top momentum)
HBPP + Top 1 Momo.....................12.28% CAGR, -41.65% MaxDD
HBPP + Top 2 Momo.....................10.47% CAGR, -27.43% MaxDD
HBPP + Top 3 Momo......................9.20% CAGR, -20.93% MaxDD

(0% buy and hold, 100% top momentum)
HBPP + Top 1 Momo.....................12.67% CAGR, -43.74% MaxDD
HBPP + Top 2 Momo.....................10.74% CAGR, -28.60% MaxDD
HBPP + Top 3 Momo......................9.37% CAGR, -20.55% MaxDD

[InsuranceGuy]

[deleted]

[MachineGhost]

You're 90%/top 3 seems like some good juice, did you by chance test 100%/top 3?  Wonder if the trend would continue to give more CAGR with minimal increase in MaxDD.

Okay, I updated it with 100% top momentum.  It looks like the best of all!  The way this works is 1-year T-Bills will be a ranking asset but the uninvested #4th, etc. will be earning 90-day interest.

Damn, I just checked and these results are still buying anything within the top x even if the absolute return is negative.  I'll have to work on that tomorrow.  So instead of getting the 30%, etc/ kicker if it is positive above T-Bills, you just stick to the default buy and hold allocation with it going to cash?

[stuper1]

InsuranceGuy,

I have some questions about your HB+SCV+top 2 MOM strategy.  Let's say that stocks do good one year, better than everything else.  That means the next year you would have 76% of your portfolio in stocks (38% in large cap, 38% in small cap value) with only 8% long bonds, 8% gold, and 8% cash for diversification.  That seems like a really exposed portfolio.  I would have thought that somewhere during the backtesting that situation would have happened and then in the following year stocks would have crashed leading to a big drawdown.  Is that not the case?  Would you be worried about that?

I guess maybe the idea is that you juice the gains enough on the way up with momentum, and then you only participate in losses for at most a year before you switch (and on average more like only half a year), and the net effect is more CAGR.  Am I thinking about this right?

It seems like a great strategy if it really works, because you are only trading once a year.

[InsuranceGuy]

[deleted]

[MachineGhost]

MG - let me know when you update your results, maybe they will more closely mimic mine.  I am confused what you mean here in the above quote, maybe you could clarify what you are asking.

It's not clear to me that if the top kicker momentum asset is not beating cash, if you put the entire position of that asset to 0% or only that top kicker momentum asset?  I am running both the 40%/60% or whatever in one portfolio; they are not separate.

[InsuranceGuy]

[deleted]

[InsuranceGuy]

[deleted]

[MachineGhost]

I think of it as a PP vs VP, or PP+SCV vs VP.  The PP or PP+SCV gives stability and diversification to the more volatile VP.

Okay, I'm going to have to run the PP and VP separate because of limitations in using both absolute momentum and buy and hold at the same time, then combine the equity curves by hand afterwards.  Annoying, but it should work.

So the results I've provided so far are strictly buy and hold + relative momentum kickers; in other words, the fourth, third or second asset depending on the top x would have been uninvested and in 90d T-Bills, regardless of whether or not any of the assets beat 1yr T-Bills or not.

BTW, whats the difference between LC Blend and the S&P 500?

[MachineGhost]

1968-2015 (Relative & Absolute Momentum, No Rebalancing)
========================================
(100% buy and hold)
HBPP............................................7.57% CAGR, -19.60% MaxDD
Correlated Risk Parity PP (No Cash)..8.89% CAGR, -24.59% MaxDD

(90% buy and hold, 10% top momentum)
HBPP + Top 1 Momo......................9.98% CAGR, -30.92% MaxDD
HBPP + Top 2 Momo......................8.76% CAGR, -24.27% MaxDD
HBPP + Top 3 Momo......................8.11% CAGR, -21.28% MaxDD
HBPP + Top 4 Momo......................7.85% CAGR, -20.36% MaxDD

(80% buy and hold, 20% top momentum)
HBPP + Top 1 Momo.....................11.14% CAGR, -35.88% MaxDD
HBPP + Top 2 Momo......................9.54% CAGR, -27.47% MaxDD
HBPP + Top 3 Momo......................8.54% CAGR, -23.03% MaxDD
HBPP + Top 4 Momo......................8.09% CAGR, -21.50% MaxDD

(70% buy and hold, 30% top momentum)
HBPP + Top 1 Momo.....................11.92% CAGR, -38.49% MaxDD
HBPP + Top 2 Momo.....................10.13% CAGR, -29.62% MaxDD
HBPP + Top 3 Momo......................8.90% CAGR, -24.42% MaxDD
HBPP + Top 4 Momo......................8.31% CAGR, -22.48% MaxDD

(60% buy and hold, 40% top momentum)
HBPP + Top 1 Momo.....................12.50% CAGR, -40.11% MaxDD
HBPP + Top 2 Momo.....................10.59% CAGR, -31.26% MaxDD
HBPP + Top 3 Momo......................9.22% CAGR, -25.55% MaxDD
HBPP + Top 4 Momo......................8.51% CAGR, -23.31% MaxDD

(50% buy and hold, 50% top momentum)
HBPP + Top 1 Momo.....................12.97% CAGR, -41.21% MaxDD
HBPP + Top 2 Momo.....................10.98% CAGR, -32.52% MaxDD
HBPP + Top 3 Momo......................9.49% CAGR, -26.49% MaxDD
HBPP + Top 4 Momo......................8.70% CAGR, -24.05% MaxDD

(40% buy and hold, 60% top momentum)
HBPP + Top 1 Momo.....................13.36% CAGR, -42.00% MaxDD
HBPP + Top 2 Momo.....................11.32% CAGR, -33.51% MaxDD
HBPP + Top 3 Momo......................9.74% CAGR, -27.33% MaxDD
HBPP + Top 4 Momo......................8.87% CAGR, -24.76% MaxDD

(30% buy and hold, 70% top momentum)
HBPP + Top 1 Momo.....................13.70% CAGR, -42.60% MaxDD
HBPP + Top 2 Momo.....................11.61% CAGR, -34.30% MaxDD
HBPP + Top 3 Momo......................9.96% CAGR, -28.04% MaxDD
HBPP + Top 4 Momo......................9.03% CAGR, -25.38% MaxDD

(20% buy and hold, 80% top momentum)
HBPP + Top 1 Momo.....................13.99% CAGR, -43.07% MaxDD
HBPP + Top 2 Momo.....................11.87% CAGR, -34.94% MaxDD
HBPP + Top 3 Momo.....................10.17% CAGR, -28.68% MaxDD
HBPP + Top 4 Momo......................9.17% CAGR, -25.98% MaxDD

(10% buy and hold, 90% top momentum)
HBPP + Top 1 Momo.....................14.26% CAGR, -43.45% MaxDD
HBPP + Top 2 Momo.....................12.11% CAGR, -35.48% MaxDD
HBPP + Top 3 Momo.....................10.36% CAGR, -29.24% MaxDD
HBPP + Top 4 Momo......................9.31% CAGR, -26.52% MaxDD

(0% buy and hold, 100% top momentum)
HBPP + Top 1 Momo.....................14.50% CAGR, -43.76% MaxDD
HBPP + Top 2 Momo.....................12.32% CAGR, -35.94% MaxDD
HBPP + Top 3 Momo.....................10.53% CAGR, -28.74% MaxDD
HBPP + Top 4 Momo......................9.45% CAGR, -27.00% MaxDD

[InsuranceGuy]

[deleted]

[stuper1]

InsuranceGuy,

I have some questions about your HB+SCV+top 2 MOM strategy.  Let's say that stocks do good one year, better than everything else.  That means the next year you would have 76% of your portfolio in stocks (38% in large cap, 38% in small cap value) with only 8% long bonds, 8% gold, and 8% cash for diversification.  That seems like a really exposed portfolio.  I would have thought that somewhere during the backtesting that situation would have happened and then in the following year stocks would have crashed leading to a big drawdown.  Is that not the case?  Would you be worried about that?

I guess maybe the idea is that you juice the gains enough on the way up with momentum, and then you only participate in losses for at most a year before you switch (and on average more like only half a year), and the net effect is more CAGR.  Am I thinking about this right?

It seems like a great strategy if it really works, because you are only trading once a year.

Here are all the years from 1973-2015 where the previous year had both LCB+SCV stocks as the top 2 asset classes:
        LCB Nom LCB Real SCV Nom SCV Real
1976 +23.7% +17.9% +53.3% +46.1%
1977 -8.0% -13.7% +21.5% +13.9%
1981 -5.2% -13.0% +14.6% +5.3%
1984 +6.2% +2.2% +2.1% -1.8%
1986 +18.1% +16.8% +7.2% +6.0%
1989 +31.4% +25.5% +12.1% +7.2%
1992 +7.4% +4.4% +28.8% +25.2%
1993 +9.9% +6.9% +23.5% +20.2%
1997 +33.2% +31.0% +31.5% +29.3%
1998 +28.6% +26.6% -6.7% -8.2%
2000 -9.1% -12.0% +21.9% +17.9%
2004 +10.8% +7.3% +22.6% +18.7%
2005 +4.9% +1.4% +6.0% +2.5%
2013 +32.3% +30.4% +39.4% +37.3%
2014 +13.6% +12.7% +7.6% +6.7%

CAGR 13.2% 9.6% 19.0% 15.1%

I am worried that at some point both will go down, but at the same time I worry about any number of political and macroeconomic induced problems causing asset classes that would otherwise diversify risk to move in tandem.  I don't have a solid answer for you, but I personally think that the the majority of the time that both LCB/SCV are the top dogs is when the economy is booming or strongly recovering (both of which would be good for a portfolio tilted towards stocks).  As one or the other starts to fade then the portfolio will diversify away from those assets.  I wish that I had a better answer...

Very interesting that each time either LCB or SCV was negative, the other was positive.  This is not what I would have expected.  I thought they were more correlated than that.  In fact, there were only five times when either one of them was negative (out of 30 total events, demonstrating the efficacy of momentum), and in four of those cases the other one had a positive return that was greater than the negative return of the negative one.  Of course, this is no guarantee of future results, but it is very interesting.