Asset Class Rotation: A Simple System

I was at dinner the other night and someone mentioned Decision Moose, so I thought I would do an update on a very simple system. I have written a lot, on World Beta, about cross market momentum in the past (i.e. asset class rotation). Some previous posts are listed at the end of this blog.

Anyway, below are some log equity curves for a simple rotation system. The same five asset classes as in my paper back to 1973; ranked on the average of the trailing 3, 6, and 12 month total returns; rebalanced monthly; Top 1 is all-in the top asset class, Top 2 is all-in split 50/50 between the top two asset classes, Top 3 is all-in split between the top three asset classes, etc. Results are frictionless. Top1 would have done around +15% last year, Top 2 -9%, and Top 3 -24%. I think you could easily expand this to more asset classes but you would have to increase the number of holdings in line with the percentages above (i.e. Top 2 40% of the investable universe).

Again, I think this just captures the alpha of momentum and increases your Sharpe to the .80 area. (Asset classes cluster around 0.20 and buy and hold around 0.40.) There are some tweaks and improvements but this is a nice example of parameter stability - and they beat buy and hold roughly 75% of the time (and have continued to work in recent years).

Some rotation funds of various flavors.

FUNDX (Newsletter here), (Fact Sheet here)
Rydex International Rotation Fund (RYFHX), (Fact Sheet here)
Rydex Sector Rotation Fund (RYSRX), (Fact Sheet here)
DWA Technical Leaders (PDP), (Fact Sheet here)
DWA Balanced (DWAFX, DWAFX), (Fact Sheet here)
VL Industry Rotation (PYH) (Fact Sheet here)
VL Timeliness (PIV) (Fact Sheet here)
Claymore/Zack’s Country Rotation (CRO) (Fact Sheet here)
Claymore/Zack’s Sector Rotation (XRO) (Fact Sheet here)
BlackStar (study here)

Comments

[Steve in TN:]

Although I agree with the author in general, following the advice of NoLoad FundX (1st one on the authors list, above) does not prevent losses in equities at the level we've experienced in the last 5 months. FundX, by their own research provides superior relative performance during bull markets but underperforms slightly during bear markets. Sure, if I had placed all my equity funds in biotech funds during the last 5 months my losses would be dramatically less, but biotech was in their highest risk category so only 10% of my funds were in this sector.

Feb 08 02:31 PM

[Steve in TN:]

By comparing all of the "rotation" funds (ETFs and other actively managed funds listed by the author), none have shown any significant advantage over an investment in the DJIA over the past year. In fact, most have done worse.

Feb 08 02:35 PM

[fatpitch2:]

Mebane:

I just came back from the MoneyShow in Orlando and spent some time with FundX people. Overall, I was impressed, but as SteveTN asserts, the FundX family (except for a new offering they have just come out with: TACTX they do not do any "tactical" or market timing.

I was much impressed with your article a few months back: "The global tactical approach" I'm sure you have considered the paring of rotation with tactical allocation; what are the results?

Do any of the funds you've listed do something like this?

Thanks!

Feb 09 08:24 AM

[Scott's Inv...:]

I agree with the first two comments - the funds listed have not performed well in today's bear market. I would also be interested in seeing some sort of hybrid strategy combining TAA and rotation. Keep up the good work!

Feb 09 09:14 AM

[Scott's Inv...:]

I agree with the first two comments - the funds listed have not performed well in today's bear market. I would also be interested in seeing some sort of hybrid strategy combining TAA and rotation. Keep up the good work!

Feb 09 09:14 AM

[raytayzmd:]

..."Decision Moose"???...hmmmmm:

"For the Decision Moose (S&P 500 index) trades, 92% (59%) generate positive returns. Decision Moose returns beat the comparable S&P 500 index returns 69% of the time.
The largest loss on any one trade for Decision Moose (S&P 500 index) is -5.1% (-22.5%).
The average return per trade for Decision Moose (S&P 500 index) is 7.3% (1.0%), with standard deviation 15.0% (7.7%).
Over just the last three years, the average return per trade for Decision Moose (S&P 500 index) is 3.0% (-1.1%), with standard deviation 3.6% (6.7%). "

...WOW!...why, that's almost better than uhhhh -- what's that guy's name?...Maddd...Madoff... that's almost better than Madoff!...funny, despite that performance, I can't find a single web reference to "Decision Moose" prior to 2008...and the only "William Dirlam" -- supposedly the website's author -- I could find works for Johnson Lemon Asset Management...not exactly a household name, huh?...now, I'm all for simple systems but I want to see the REAL results in the REAL world verified by audited REAL brokerage account statements from a REAL broker...otherwise, you're just FOS.

Feb 10 07:12 AM