A Brief Look At 'Dual Momentum'

by: Left Banker


Gary Antonacci's book, Dual Momentum, describes a momentum investment strategy.

The dual momentum strategy combines relative and absolute momentum.

The objective is to exploit the "momentum anomaly" without the excessive downdraws often associated with relative momentum investing.

In his recent, well-received book, Dual Momentum Investing: An Innovative Strategy of Higher Returns with Lower Risk (McGraw Hill Education), Gary Antonacci sets out to describe an investing system based on two momentum metrics. The first is relative momentum where investment alternatives are compared and the highest performer(s) selected. This is followed by an absolute momentum filter where the investment candidates are compared to a low-risk standard.

The bulk of the book is devoted to a review of the academic literature on various investment approaches. This exercise leads to Antonacci's conclusion that momentum based investing will provide consistent outperformance. It is only in the last few chapters that he fleshes out his dual momentum strategy for the reader. He provides two examples. Both of these are documented on his website. Of the two only the simpler one, Global Equities Momentum or GEM, is described in detail. The second, Dual Momentum Sector Rotation or DMSR, is a proprietary system and remains undetailed in neither the book nor the website.

Global Momentum

GEM involves switching between U.S. equities and Global ex-U.S. equities based on All Country World ex-U.S. index of global large- and mid-cap non-U.S. equities and the S&P 500. Relative momentum is evaluated on the basis of performance over the past 12 months. For the second momentum filter, the strategy compares the better performing index against U.S. Treasury Bills, again for the past 12 months. If the better performer also outperformed T-Bills, the portfolio is invested in the better performing fund. If not, it is invested in U.S. aggregate bonds. The portfolio is re-evaluated monthly. There's a neat flowchart that outlines the strategy for the simple two-holdings choice. The author follows this description with several charts and tables demonstrating the efficacy of the GEM dual momentum strategy vs. the ACWI index. These results are tabulated here.

There is a variation on this theme, Global Balanced Momentum or GBM, which holds 70% of the portfolio in GEM and 30% in a fixed income holding selected from U.S. long treasury bonds, global government bonds, high yield bonds and 90-day U.S. treasuries by using the dual momentum approach. In the book, GBM is compared to the traditional 60/40 U.S. stock/bond balanced portfolio.

Either of these strategies can be easily followed using commission-free ETFs from Vanguard, Fidelity, Charles Schwab or TD Ameritrade.

Sector Rotation

The second example of the dual momentum strategy is focused on sector rotation. This is more intriguing, but not documented in any detail. DMSR rotates among the strongest U.S. stock market equity sectors and U.S. Aggregate Bonds. Without details it is impossible to determine the parameters of the investment scheme, but based on all that has gone before its introduction in the book I assume it, too, is based on the previous 12 months returns. Antonacci does not tell us how many sectors are invested. The frequency of rebalancing is also omitted, although consistency would suggest a monthly re-evaluation here as well.

The DMSR strategy is supported with a table documenting returns, standard deviations, annual Sharpe ratio and maximum drawdowns superior to that of various benchmarks including the S&P 500, equal-weight sector portfolio and an equal-weight/aggregate-bond portfolio for the period 1993-2013. The results are broken down monthly and compared to the S&P 500 on an annual basis here. At a first look, one cannot help but be impressed.

A close look, focused on recent years, presents a somewhat less impressive picture however. For 4 of the past 6 years (2009-2014YTD) DMSR has lagged the S&P 500. I've plotted annualized return results of the cumulative DMSR investing strategy initiated every year since 1993 using Antonacci's data referenced in the previous paragraph. The results are shown in this chart:

Figure 1: Annualized performance of Gary Antonacci's Dual Momentum Sector Rotation portfolio for investments begun each year from 1993 through 2014. Data from optimalmomentum.com.

Although not apparent in this presentation, DMSR handled the 2008 crash extremely well, losing only 4.7% compared to the S&P 500's -37% loss. This is a strong testament to the power of the dual momentum strategy in weathering bear market conditions.

But it is also clear that since 2008 DMSR has fared less well vs. the S&P 500. The current year to date has been an exceptional underperformer for the strategy dragging down the cumulative returns for the post 2008 period. The fact of an occasional down year is, of course, not distressing; underperforming years are to be expected from any investment strategy, particularly one that performs so well in downturns. But the 6-year run of not meeting benchmark performance does stand out. Cumulative performance from an entry point (which is the standard that Antonacci consistently uses in evaluating his approach) over this period has to give one pause. Might the market be moving to close the momentum loophole as appreciation of its existence becomes more widespread?

Momentum Investing for the Future

Fama and French, writing in 2008, described momentum as the "premier market anomaly." Antonacci spends several chapters expanding on this theme, arguing that momentum is the most exploitable inefficiency in the market. Of course, this has not passed unnoticed by the investing community. One might reasonably expect its advantages as an investing tool to wane as awareness increases and people devise investing strategies to take advantage of it. Antonacci acknowledges this possibility but tends to dismiss it with arguments based on "deep-seated behavioral biases" and "human inertia and lingering ignorance." The DMSR data presented above can be interpreted as suggesting that human bias and ignorance notwithstanding, the exploitability of momentum investing may be showing signs of having run its course.

Antonacci gives us much to consider in Dual Momentum. Relative momentum has been the pillar of momentum investing. The insight of dual momentum is that by coupling relative momentum with a measure of absolute momentum against a low-risk benchmark standard one can moderate the downdraws relative momentum strategies often suffer in bear market conditions.

One may take issue with the sparse details presented in support of the strategy in this book that would take it beyond the academic research that occupies so much of it. Some will question the use of a 12-month look-back period which has the support of academic research but is longer than many practitioners would apply in real world conditions. Will not shorter look-back periods also moderate downdraws? He also does not remove recent returns from consideration, an approach that has considerable academic support for use with the 12-month look-back as he acknowledges. But I would say that such details are secondary to the main arguments presented in the book which provides useful insights into building a momentum investment strategy of one's own.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.