SACEMS Based on Martin Ratio?

In response to “Robustness of SACEMS Based on Sharpe Ratio”, a subscriber asked whether Martin ratio might work better than raw returns and Sharpe ratio for ranking assets within the Simple Asset Class ETF Momentum Strategy (SACEMS), which each month selects the best performers over a specified lookback interval from among the following eight asset class exchange-traded funds (ETF), plus cash:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 2000 Index (IWM)
SPDR S&P 500 (SPY)
iShares Barclays 20+ Year Treasury Bond (TLT)
Vanguard REIT ETF (VNQ)
3-month Treasury bills (Cash)

To investigate, we focus on the SACEMS equally weighted (EW) Top 3 portfolio and compare outcomes across lookback intervals ranging from one to 12 months for the following three asset ranking metrics:

1. Raw return – cumulative total return over the lookback interval.
2. Sharpe ratio (SR) – average daily excess return (asset return minus T-bill return) divided by standard deviation of daily excess returns over the lookback interval, with months approximated as 21 trading days. We set SR for Cash at zero (though it is actually zero divided by zero).
3. Martin ratio (MR) – average daily excess return divided by the Ulcer Index calculated from daily returns over the lookback interval, with months again approximated as 21 trading days.

We employ gross compound annual growth rates (CAGR) and maximum drawdowns (MaxDD) to compare ranking metrics. Using monthly dividend-adjusted closing prices for asset class proxies and the yield for Cash during February 2006 (when all ETFs are first available) through December 2018, we find that: (more…)