Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Friday October 1, 2021. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Benchmarking MyPlanIQ Tactical Portfolios

We consider ourself as one of the earliest advocates on tactical asset allocation portfolios using momentum or trends on major assets. Since our start in 2010, we have seen many tactical funds (mutual funds and ETFs) come and go. In this newsletter, we compare our MPIQ (Asset Allocation Composite (AAC) portfolios (See our investment methodology for more details) with some of the popular tactical funds in the market. 

Cambria Global Momentum ETF

Currently, the only major momentum based asset allocation ETF is Cambria Global Momentum ETF (GMOM) (there are many momentum factor based stock index funds like MTUM. This needs another separate discussion). We took a special interest in this ETF as it’s managed by Cambria Investment Management, LP whose principal is Mebane Faber who has made global tactical allocation strategies popular in early days. 

We would also like to point out that Cambria had an earlier version of global tactical allocation ETF (symbol was GTAA) that eventually desisted, mostly because of its bad performance. 

On Cambria’s website, it stated the following for GMOM:

The Cambria Global Momentum ETF (the “Fund”) seeks to preserve and grow capital from investments in the U.S. and foreign equity, fixed income, commodity and currency markets, independent of market direction. The Fund intends to target investing in the top 33% of a target universe of approximately 50 ETFs based on measures of trailing momentum and trend. The portfolio begins with a universe of assets consisting of domestic and foreign stocks, bonds, real estate, commodities and currencies.

Based on Morningstar, its allocation on 9/10/2021 was: 

The fund is classified as world allocation by Morningstar as it can hold both US and Non-US stocks. 

The top 10 holdings as of 9/13/2021 are:

This fund’s total expense is 0.93%, on the high side. On the other hand, it invests in their own ETFs that have additional not-so-cheap expense fees. For example, its largest holding SYLD (see the above) has a total expense of 0.59%. So adding this up, the fund’s overall expense ratio is well over 1% for sure. 

The fund’s AUM (Asset Under Management) is $61 million. It has almost 7 years history. 

Northern Trust and Ned Davis Tactical Mutual Funds

Next, we look at two large tactical allocation funds. The first is Northern Trust Global Tactical Asset Allocation (BBALX). The fund’s AUM is about $122 million. It interested us as it has one of the longest history as a global tactical asset allocation fund: since 7/1/93. 

The next one is VanEck NDR Managed Allocation Fund (NDRMX). NDR is short hand for the famed Ned Davis Research. The fund description:

VanEck has partnered with Ned Davis Research (NDR), a recognized leader in objective market and economic data and analysis. VanEck and NDR developed the VanEck NDR Managed Allocation Fund (the “Fund”), a tactical asset allocation fund that has the flexibility to freely allocate among securities and cash. The Fund seeks capital appreciation by allocating primarily to exchange-traded products (ETPs) that invest in domestic and foreign equities, and U.S. debt securities and cash and cash equivalents. The Fund uses NDR’s model that combines macroeconomic, fundamental and technical indicators to overweight asset classes expected to outperform on a relative basis and underweight or exit those expected to underperform.

This fund’s expense ratios range from 1.01% (I shares) to 1.31% (A shares). Inception date is 5/11/2016. 

Benchmarking MPIQ portfolios

The following compares returns and maximum drawdowns of MPIQ portfolios with the three funds mentioned above:

Portfolio Performance Comparison (as of 9/13/2021):
Ticker/Portfolio Name Max Drawdown YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
P Composite Momentum Scoring Global Risk Assets 22.7% 16.9% 35.5% 17.9% 17.7% 15.1% 14.8%
MPIQ ETF Allocation All Stocks 21.5% 19.7% 37.1% 17.2% 16.2% 14.4% 11.7%
GMOM (Cambria Global Momentum ETF) 25% 16.5% 25.6% 6.0% 7.4%    
BBALX (Northern Global Tactical Asset Allc) 37.2% 8.5% 18.7% 8.4% 7.8% 7.3% 5.6%
NDRMX (NDRMX) 20.8% 10.5% 23.3% 7.1% 7.6%    

**: NOT annualized

Note: NDRMX’s maximum drawdown was 20.8%, occurring in 2020. Since this fund has a shorter history, when compared within the same period (since 2016), MPIQ’s two portfolios’ maximum drawdowns were about 16% to 17%, still lower than NDRMX’s. Similarly, MPIQ’s 16-17% maximum drawdowns are lower than GMOM’s 25%.

A few observations: 

  • The three funds had very comparable 5 year annualized returns (from 7.4% to 7.8%)
  • The two MPIQ portfolios outperformed the funds by some big margins: 16%-17% vs. 7.4%-7.8% for the past 5 years. For a much longer history like 15 years, the two portfolios did way better than BBALX, the only fund that has such a long history: 11%-14% vs. 5.6%. 
  • On the other hand, the two MPIQ portfolios have lower maximum drawdown than these funds. 

Without knowing the internal details on these funds, we speculate that our outsized performance is due to 

  1. Our strategies are superior: the AAC incorporates both macro trend and economic indicators and relative strength among major assets. This has proven to be better than many early versions of tactical asset allocations strategies. 
  2. We only use extremely low cost index funds (mostly Vanguard index ETFs) that represent major assets. Our experience has been that to get a more steady but still extremely competitive long term return, it’s better to stick to low cost major index funds. 
  3. As always, our fixed income portion has done so much better than any other public funds. 
  4. We don’t have 1% or higher expense ratios only some fixed low subscription fees. This will definitely cut into the returns for investors. With the expense of doing 2-3 times rebalances at most in a year (at the beginning of a month), our users can save hefty fees and have more freedom (as they control their own portfolios, for example, for tax reasons). 

Finally, it’s important to point out that as always, tactical portfolios can underperform broad based buy and hold portfolios for a period of time. But in a long enough period of time (such as 15 to 20 years), we are confident that portfolios like ours will be able to achieve comparable or even much better returns with much lower risk. This is especially important in the current high valuation and speculative environment. 

Market Overview

Well, stock markets finally experienced some ‘meaningful’ loss after Labor Day: S&P 500 lost more than 2% from its pre holiday peak. Investors have been so accustomed to almost non-stop, straight line rise of stocks since the pandemic low in March 2020. The following chart shows how the four major assets (US stocks (VTI), US REITs (VNQ), Developed foreign stocks (VEA) and emerging market stocks (VWO)) have fared since March 2020:

The weakness of emerging market stocks (VWO) this year is noticeable and understandable: investors are leery on the pandemic development. We believe the following events can potential develop into some big challenges to financial markets: 

  • The drag on or worsen development of Covid-19 pandemic. Vaccines has proven to be somewhat effective. But they are not enough to see whether they can effectively tame Covid variants. 
  • The upcoming inflation: whether it’s transitory or not is still a big question. 
  • The potential Chinese property market and/or financial system crises — the extremely overvalued Chinese real estate markets in a highly leveraged financial system recently surfaced and might develop into a crisis that can seriously affect China and thus the world’s economy.  

As always, we reiterate our caution on the current markets and advocate the following practice:

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

Stock valuation is still extremely high by historical standard. For the moment, we believe it’s prudent to be cautious while riding on market uptrend. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.  

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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