Global Tactical Asset Rotation: What's Working?

by: GestaltU

It's no secret we are big fans of trend following and asset class rotation strategies at GestaltU. Unfortunately, many of these approaches have had their worst 1,2,3 and 5 year periods in the past 40 years recently.

We thought we would check in on a variety of long-only asset rotation strategies to see how they've fared since the current stock market rally began in November 2012. We ran tests using our standard 10 asset class portfolio from November 1st through Friday:

U.S. Total Stock Market Index (NYSEARCA:VTI)

Europe 350 Index (NYSEARCA:IEV)


MSCI Emerging Markets (NYSEARCA:EEM)

U.S. Real Estate (BATS:ICF)

Int'l Real Estate (NYSEARCA:RWX)


Commodities (NYSE:DBC)

Intermediate Treasuries (NYSEARCA:IEF)

20+ Year Treasuries (NYSEARCA:TLT)


U.S. Total Stock Market Buy and Hold (Benchmark)

U.S. Stocks Benchmark

It's worth observing that the current run in U.S. stocks is in the 89th percentile of all periods of similar length through the period 1964 - present. As the chart below illustrates, on a 12-month smoothed basis, stocks are running at a 72nd percentile Sharpe. Clearly we are running up against peak annualized Sharpe ratios for this cycle, though it is certainly possible for markets to thrust higher over the next few months before beginning an intermediate term contraction phase.

Rolling Sharpe

U.S. Balanced (50/50 Stocks/Treasuries Benchmark)

U.S. Balanced Benchmark

Raw Geometric Return Momentum

CAGR Momentum

Sharpe Ratio Momentum

Sharpe Momentum

Sortino Ratio

Sortino Ratio Momentum

Omega Ratio

Omega Ratio Momentum

MAR Ratio

MAR Ratio Momentum

Hi-Low Differential Ratio

Hi-Low Differential Momentum

Fractal Efficiency

Fractal Efficiency Momentum

10 month Moving Average

10 Month Moving Average

All data sourced from Yahoo finance.

You can see that none of the global rotational or tactical strategies have come close to the performance of a simple Buy and Hold U.S. stock market portfolio since the start of the rally about 10 months ago, though the raw (not risk-adjusted) momentum strategy exceeded the performance of the balanced portfolio.

What does this mean for tactical strategies going forward? We have very strong evidence of the existence of trends and momentum in every asset market known to man: wine, art, homes, bonds, stocks, commodities, currencies, you name it. AQR recently posted a paper titled 'A Century of Evidence on Trend Following Investing' that showed 20% annualized performance for 50 asset markets since 1900.

So long as markets are dominated by humans and human decisions are driven by herding and informational cascades, momentum will exist in asset markets. No strategy works all the time in every market environment, but some strategies are timeless. I have every confidence that momentum and trend following will post a very strong comeback over the next five years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.