Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for July 2022 (Final)

Momentum Investing Strategy (Strategy Overview)

Allocations for July 2022 (Final)
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Strategic Allocation

Is there a best way to select and weight asset classes for long-term diversification benefits? These blog entries address this strategic allocation question.

How Canadian Pension Funds Outperform

Which institutional investors do best and why? In the September 2020 update of their paper entitled “The Canadian Pension Fund Model: A Quantitative Portrait”, Alexander Beath, Sebastien Betermier, Chris Flynn and Quentin Spehner compare performances of Canadian pension funds and those of other countries, focusing on Sharpe ratio of the fund assets, Sharpe ratio of the fund net portfolio (long assets and short liabilities) and correlation between fund assets and liabilities. They look at both large (over $10 billion U.S. dollars in assets as of 2018) and small funds. They consider two test periods, five years (2014-2018) and 15 years (2004-2018), excluding funds with missing annual data. The 5-five year sample has 250 funds from 11 countries. The 15-year sample has 105 funds. After comparing performance, they look for reasons why Canadian performance differs. Using performance data, asset allocation strategies and cost structures for the selected 250 pension funds, they find that:

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Allocations and Returns of Endowments

How do U.S. non-profit endowment funds allocate and perform? In their November 2019 paper entitled “The Risk, Reward, and Asset Allocation of Nonprofit Endowment Funds”, Andrew Lo, Egor Matveyev and Stefan Zeume examine recent asset allocations and investment returns of U.S. public non-profit endowment funds. Due to the unstructured nature of asset reporting, they manually assign each asset in each fund to one of nine categories: (1) public equity; (2) fixed income; (3) private equity; (4) cash instruments; (5) hedge funds; (6) real estate; (7) real assets and real return; (8) trusts; and, (9) cooperative investments. Using tax return data encompassing 34,170 endowment funds during 2009 through 2018, they find that: Keep Reading

Effectiveness of Various Risk Controls during the COVID-19 Crash

How well did previously identified portfolio risk management strategies work during the COVID-19 market crash? In their July 2020 paper entitled “Strategic Risk Management: Out-of-Sample Evidence from the COVID-19 Equity Selloff”, Campbell Harvey, Edward Hoyle, Sandy Rattray and Otto Van Hemert extended analyses of risk management strategies they identified in a 2016-2019 series of papers with an out-of-sample test of the February-March 2020 stock market sell-off. These strategies include:

  • Long put options, short credit risk, long bonds or long gold.
  • Trend following based on time series/intrinsic momentum (past return divided by volatility of returns over a specified lookback interval) or on moving average crossovers.
  • Holding defensive stocks (based on profitability, payout, growth, safety or quality).
  • Volatility targeting (increasing/decreasing exposure when past volatility is relative low/high).
  • Rebalancing a stocks-bonds portfolio only half way and only when recent (1, 3 or 12 months) portfolio return is above its historical average.

Extending analyses from their prior papers through March 2020 to capture the COVID-19 crash, they find that:

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SACEVS Best Value + SACEMS EW Top 2?

A subscriber asked for a comparison of two 50%-50% monthly rebalanced combinations of Simple Asset Class ETF Value Strategy (SACEVS) and Simple Asset Class ETF Momentum Strategy (SACEMS) portfolios, as follows:

  1. 50-50 Best Value + EW Top 2: SACEVS Best Value plus SACEMS EW Top 2, employing a somewhat more aggressive momentum portfolio.
  2. 50-50 Best Value + EW Top 3: Best Value plus SACEMS equal-weighted (EW) Top 3, as tracked at “Combined Value-Momentum Strategy (SACEVS-SACEMS)”.

To investigate, we run the two combinations and compare cumulative performances and annual performance statistics. Using monthly SACEVS Best Value and SACEMS EW Top 2 and EW Top 3 portfolio returns commencing July 2006 (limited by SACEMS), we find that: Keep Reading

Forcing SACEMS to Agree with SACEVS

A subscriber asked whether forcing the Simple Asset Class ETF Momentum Strategy (SACEMS) to agree with the Simple Asset Class ETF Value Strategy (SACEVS) when the latter assigns zero weight to stocks or government bonds improves the performance of the former. Specifically, the suggested change would force to Cash in SACEMS any allocation to SPDR S&P 500 ETF Trust (SPY) or iShares 20+ Year Treasury Bond ETF (TLT) occurring when SACEVS allocates 0% to SPY or TLT, respectively. To investigate, we impose this additional condition on SACEMS and compare detailed monthly and annual performance statistics for this new version of SACEMS (New) to the original version (Base). Using monthly SACEVS allocations and monthly dividend-adjusted prices of the SACEMS universe ETFs during February 2006 through July 2020, we find that: Keep Reading

Safe Haven Benchmark Index

How should investors evaluate the effectiveness of a safe haven asset? In their July 2020 paper entitled “A Safe Haven Index”, Dirk Baur and Thomas Dimpfl devise and apply a safe haven index (SHI) to evaluate over 20 individual potential safe haven assets. SHI consists of seven equal-weighted assets: gold, Swiss franc, Japanese yen, 2-year, 10-year and 30-year U.S. Treasuries and 10-year German government bonds. For evaluations, they focus on four safe haven events: the October 1987 stock market crash, the September 2001 terrorist attacks, the September 2008 Lehman collapse and the March 2020 COVID-19 pandemic. Using daily data for index components and other potential safe haven assets as available during January 1985 through May 2020, they find that:

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Ending with the Beginning in Mind

How should investors think about the interactions between working years (retirement account contributions) and retirement years (retirement account withdrawals)? In his June 2020 paper entitled “Retirement Planning: From Z to A”, Javier Estrada integrates working and retirement periods to estimate how much an individual should save and how they should invest to achieve a desired retirement income and ultimate bequest to heirs. He illustrates his analytical solution empirically for U.S. stocks and bonds, first using a base case plus sensitivity analysis and then using Monte Carlo simulations. His base case assumes:

  • Work will last 40 years with a 60%/40% stocks/bonds retirement portfolio.
  • Retirement will last 30 years with beginning-of-year real (inflation-adjusted) withdrawals of $60,000 from a 40%/60% stocks/bonds retirement portfolio and ultimate bequest $300,000.

Using annual data for U.S. stocks (the S&P 500 Index total return), bonds (10-year U.S. Treasury notes) and U.S. inflation during 1928 through 2019, he finds that: Keep Reading

Demise of Multi-class Investing?

Does multi-class investing boost performance for sophisticated investors such as educational endowments? In his June 2020 paper entitled “Endowment Performance and the Demise of the Multi-Asset-Class Model”, Richard Ennis examines recent performance of educational endowment funds, with focus on allocations to alternative assets. Using performance data from a report on 774 university endowments and from hand-collected annual reports for some large individual endowments during June 2008 through June 2019, he finds that: Keep Reading

Exploit U.S. Stock Market Dips with Margin?

A subscriber requested evaluation of a strategy that seeks to exploit U.S stock market reversion after dips by temporarily applying margin. Specifically, the strategy:

  • At all times holds the U.S. stock market.
  • When the stock market closes down more than 7% from its high over the past year, augments stock market holdings by applying 50% margin.
  • Closes each margin position after two months.

To investigate, we assume:

  • The S&P 500 Index represents the U.S. stock market for calculating drawdown over the past year (252 trading days).
  • SPDR S&P 500 (SPY) represents the market from a portfolio perspective.
  • We start a margin augmentation at the same daily close as the drawdown signal by slightly anticipating the drawdown at the close.
  • 50% margin is set at the opening of each augmentation and there is no rebalancing to maintain 50% margin during the two months (42 trading days) it is open.
  • If S&P 500 Index drawdown over the past year is still greater than 7% after ending a margin augmentation, we start a new margin augmentation at the next close.
  • Baseline margin interest is U.S. Treasury bill (T-bill) yield plus 1%, debited daily.
  • Baseline one-way trading frictions for starting and ending margin augmentations are 0.1% of margin account value.
  • There are no tax implications of trading.

We use buying and holding SPY without margin augmentation as a benchmark. Using daily levels of the S&P 500 Index, daily dividend-adjusted SPY prices and daily T-bill yields from the end of January 1993 (limited by SPY) through May 2020, we find that: Keep Reading

Enhancement of Dual Momentum with Just Three Assets?

In response to “Review of Dual Momentum with Just Three Assets”, a subscriber suggested adding gold in competition with long-term U.S. Treasury bonds as a safe haven from equities. To test this potential enhancement of Accelerating Dual Momentum (ADM), we each month:

  1. Calculate for each of SPDR S&P 500 (SPY), iShares MSCI EAFE Small-Cap ETF (SCZ), iShares 20+ Year Treasury Bond (TLT) and SPDR Gold Shares (GLD) the sum of its 1-month, 3-month and 6-month past returns.
  2. If sums for both SPY and SCZ are negative, buy the one of TLT and GLD with the higher sum.
  3. If both sums for SPY and SCZ are not negative, buy the one with the higher sum.

Using end-of-month dividend-adjusted prices of these ETFs during December 2007 (limited by SCZ) through April 2020, we find that: Keep Reading

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