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Extending The Backtesting Of The Quarterly Tactical Strategy To Mid-1999

I have recently written an article on Seeking Alpha about a Quarterly Tactical Strategy (NYSE:QTS) that tactically updates a single holding, as the name implies, quarterly. The backtesting of nine mutual funds (actually eight mutual funds in the ranking pool and one mutual fund as a cash filter) was done using ETFreplay and extended from 2003-present. The timeframe was limited by the capabilities of ETFreplay.

The data for the mutual funds actually go back to 1996, so theoretically we should be able to backtest to at least 1997. These mutual funds are proxies for nine ETFs, so the strategy can be traded with mutual funds or ETFs. And the ETFs have almost perfect correlation with the mutual funds from 2011-present.

More information on the QTS can be found here and in the figure below. The CAGR=28.8%, and the maximum drawdown is 19.1%. There are only seven losing quarters in this timeframe. The QTS produces positive returns every year (minimum annual gain of 17.7% in 2004), and beats the S&P 500 Index every year except 2013 (25.6% versus 32.3%).

(click to enlarge)Click to enlarge

I decided to try and extend the timeframe of the backtesting. That is the focus of this article. It turns out that has data on the mutual funds back to January, 1999, and I could run the calculations by hand. I know hand calculations are taboo in this technology age, but I'm not against using them when push comes to shove. So I carefully went through the timeframe of June 30, 1999 - December 31, 2003. I started on June 30, 1999 because I needed rankings of 5-month (i.e. 105 day) returns.

I tried to mimic the calculation used by ETFreplay for the QTS. From, I obtained 5-month returns and 20-day returns for each mutual fund at the end of each quarter, and ranked the mutual funds in each category. I then found the top-ranked mutual fund by multiplying the weighting (0.5) by the ranking of the mutual fund in each category, and adding the two components together. This is the process that ETFreplay utilizes. The mutual fund with the lowest number was selected as the top-ranked mutual fund in that quarter.

I didn't calculate the 3-month moving average of the top-ranked ETF each quarter, but it appeared that the top-ranked mutual fund would pass the filter test in all quarters.

Anyway, here are the quarterly results:

July-Sept 1999 PREMX Growth = +4.98%

Oct-Dec 1999 PREMX Growth = +19.22%

1999 (partial) = +25.5%; SPY = +8.0%; Difference = 17.5%

Jan-Mar 2000 VEIEX Growth = -2.40%

Apr-June 2000 PREMX Growth = +2.94%

July-Sept 2000 PREMX Growth = +6.47%

Oct-Dec 2000 VFIIX Growth = +3.71%

2000 = +11.1%; SPY = -9.8%; Difference = 20.9%

Jan-Mar 2001 PREMX Growth = +4.62%

Apr-June 2001 VFIIX Growth = +1.23%

July-Sept 2001 VGSIX Growth = -2.48%

Oct-Dec 2001 PREMX Growth = +7.44%

2001 = +11.1%; SPY = -12.1%; Difference = 23.2%

Jan-Mar 2002 VEIEX Growth = +10.39%

Apr-June 2002 VGSIX Growth =+4.80%

July-Sept 2002 VGSIX Growth = -8.45%

Oct-Dec 2002 VFICX Growth = +1.59%

2002 = +7.6%; SPY = -21.5%; Difference = 29.1%

Jan-Mar 2003 PREMX Growth = +5.85%

Apr-June 2003 PREMX Growth = +13.76%

July-Sept 2003 NAESX Growth = +8.65%

Oct-Dec 2003 VEIEX Growth=+18.85%

2003 = +55.5%; SPY = +28.2%; Difference = 27.3%

It can be observed that out of 18 quarters in this backtesting, there were only three negative quarters. It should be noted that 2000-2002 were bear equity markets, so the annual growth by the strategy in those years is excellent (considering SPY dropped about 50% in those years).

Please note that the return in 2003 is more than what ETFreplay calculated in 2003 (55.5% versus 44.3%). The reason there is a difference is because NAESX was selected in my calculations while PREMX was selected in the ETFreplay calculation in the third quarter. I have searched for what caused the difference, and at this time, I am not able to resolve why there are different selections. When I go to ETFreplay and look at the 5-month (105 day) and 20 day returns, it seems NAESX should have been selected in this quarter. But it was not; rather PREMX was selected.

In conclusion, if I did not make any mistakes, I have successfully backtested the QTS to mid-1999, and the results look very good. This should give us more confidence in the capability of the QTS.

There is an additional benefit of this exercise. There is always a valid concern in tactical asset allocation strategies that data bias is present. Sometimes the expression "data mining" is used to express this idea. In this particular TAA strategy, the model was developed using data from 2003-present. By extending the backtesting to mid-1999 and calculating good results, I am, in a way, showing that perhaps this strategy is not the result of "data mining."

Please realize you use this information at your own risk. I am only sharing this information for your consideration.