Each month, we are following the live trading performance of our guest columnist, Anthony Garner. Since August 2015, Anthony has been buying from a universe of 60 New York-listed exchange traded funds (ETFs) which offer liquid exposure to a wide opportunity set of equity and commodity markets. So far, the system (labelled TAA1) has fared better than the MSCI World Index, with lower volatility and drawdown.
The system's guiding principle is not to try and second guess markets - if markets are going up, they are bought and if there is negative momentum, they are sold. Anthony's specific momentum criteria, along with his portfolio weighting methodology, can be viewed on his website but if risk assets aren't doing well, the model switches straight to cash - a tactic that in back-test simulations (and in the volatile period at the start of 2016, when TAA1 was live) was found to reduce drawdown compared with the MSCI World Index, which is the system's benchmark.
Performance of TAA1 versus MSCI World August 2015 to April 2016
|TAA1 System||MSCI World|
|CAGR||-2.76 %||-5.23 %|
|Annualised Volatility||4.61 %||16.63 %|
|Downside Deviation||3.68 %||8.38 %|
|Maximum Drawdown||-4.71 %||-11.46 %|
|Correlation TAA1 to MSCI World||0.82|
Source: Anthony Garner
The main feature of the last month has been a continuous build-up of emerging market equities in the portfolio and the reduction of cash. The portfolio now has exposure to growth in Vietnam, Indonesia, The Philippines and Thailand; as well as Brazil and South Africa. The most significant developed market exposure is to Canada, with smaller positions in South Korea, Hong Kong and Singapore.
The build-up of risk positions at the expense of nominally risk-free cash holdings might raise eyebrows but Anthony would rather trust the system than make a judgement call. Over the long-term his contention is that a simple tactical asset allocation system like TAA1 (he intends to develop other rules-based strategies too), will outperform a standard "long at all times" stock index in relative (to risk) and possibly also absolute terms.
Of course, the TAA1 system will go through periods of under and overperformance. It must also be noted that unlike the MSCI World, which has a straightforward weighting according to market capitalisation, TAA1 equal-weights holdings in its selection basket rules, so can be expected to deviate from the benchmark in any case.
So far TAA1 has worked well, especially considering it launched in less favourable market conditions than had been seen in the prior two years. Now, with more assets invested than at any time since the system went live, the next real test will be how it stands up in the next market shock. Time will tell but Anthony's firm belief is that systematic rules-based investing will outperform so-called star fund managers.