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Update of Findings for a Highly Influential Asset Allocation Paper

July 19, 2022 • Posted in Strategic Allocation

“A Quantitative Approach to Tactical Asset Allocation” is a highly influential paper (over 253,000 downloads from SSRN) about asset allocation based on trend following, with the original version posted in early 2007 and a revision in early 2013. The strategy in that paper applies a 10-month simple moving average (SMA10) timing rule separately to each of five total return indexes as components of an equally weighted, monthly rebalanced portfolio: (1) S&P 500 Index; (2) 10-Year Treasury note constant duration index; (3) MSCI EAFE international developed markets index; (4) Goldman Sachs Commodity Index (GSCI); and, (5) National Association of Real Estate Investment Trusts index. Specifically, at the end of each month, the model enters from cash (exits to cash) any index crossing above (below) its SMA10. Entry and exit dates are the same as signal dates (requiring some anticipation of signals before the close). This paper (summarized in “Asset Allocation Based on Trends Defined by Moving Averages”) spawned hundreds (thousands?) of trend following/momentum-based asset allocation strategies since publication, including to some degree the Simple Asset Class ETF Momentum Strategy (SACEMS). How well does the original strategy perform during ascendance of exchange-trade funds (ETF) as asset class proxies? To evaluate, we apply the strategy (QA-TAA) to the following five asset class proxy ETFs and cash:

  • SPDR S&P 500 ETF Trust (SPY)
  • iShares Barclays 20+ Year Treasury Bond ETF (TLT)
  • iShares MSCI EAFE ETF (EFA)
  • Invesco DB Commodity Index Tracking Fund (DBC)
  • Vanguard Real Estate Index Fund (VNQ)
  • 3-month Treasury bills (Cash)

We consider buying and holding SPY, the SMA10 ruled applied to SPY (SPY:SMA10) and an equally weighted, monthly rebalanced portfolio of the five asset class ETFs (EW All) as benchmarks. Using monthly dividend-adjusted prices for the specified assets during February 2006 (limited by DBC) through June 2022, we find that:

(more…)

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