Conservative Breadth Rule for Asset Class Momentum Crash Protection

Does an asset class breadth rule work better than a class-by-class exclusion rule for momentum strategy crash protection? In their July 2017 paper entitled “Breadth Momentum and Vigilant Asset Allocation (VAA): Winning More by Losing Less”, Wouter Keller and Jan Keuning introduce VAA as a dual momentum asset class strategy aiming at returns above 10% with drawdowns less than -20% deep. They specify momentum as the average of annualized total returns over the past 1, 3, 6 and 12 months. This specification gives greater weight to short lookback intervals than a simple average of past returns over these intervals. Specifically, they:

1. Each month rank asset class proxies based on momentum.
2. Each month select a “cash” holding as the one of short-term U.S. Treasury, intermediate-term U.S. Treasury and investment grade corporate bond funds with the highest momentum. 
3. Set (via backtest) a breadth protection threshold (B). When the number of asset class proxies with negative momentum (b) is equal to or greater than B, the allocation to “cash” is 100%. When b is less than B, the base allocation to “cash” is b/B.
4. Set (via backtest) the number of top-performing asset class proxies to hold (T) in equal weights. When the base allocation to “cash” is less than 100% (so when b<B), allocate the balance to the top (1-b/B)T asset class proxies with highest momentum (irrespective of sign).
5. Mitigate portfolio rebalancing intensity (when B and T are different) by rounding fractions b/B to multiples of 1/T.

They construct four test universes from: a short sample of 17 (mostly simulated) exchange traded fund (ETF)-like global asset class proxies spanning December 1969 through December 2016; and, a long sample of 21 index-like U.S. asset classes spanning December 1925 through December 2016. After reserving the first year for initial momentum calculations, they segment each sample into halves for in-sample optimization of B and T and out-of-sample testing. For all cases, they apply 0.1% one-way trading frictions for portfolio changes. Their key portfolio performance metrics are compound annual growth rate (CAGR), maximum drawdown (MaxDD) and a composite of the two. Using monthly returns for the selected ETF-like and index-like assets over respective sample periods, they find that:

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