TAA Strategy Performance Over Time

by: Paul Novell

In this post, I'm going to take a look at performance as a whole of a group of TAA strategies and how that performance has varied over time. I'll then compare it to the classic 60/40 US stock/US bond portfolio and a more globally diversified and modern portfolio, the All Weather Portfolio. There are some interesting things to note in the analysis. Let's get to it.

The data I'm using is from Allocate Smartly. I've taken return data for all the TAA strategies they track, 60/40, and the All Weather Portfolio (a globally diversified portfolio). Data is from 1970 through October 2016 (Note: Not all the strategies have performance data going back to 1972). I averaged the performance of all the TAA strategies to compare them as a whole to the two other "static" strategies. Finally, to smooth out the data somewhat, I calculated three-year rolling returns for all the portfolios. Below is a chart of the three-year rolling performance of all the TAA strategies, the 60/40 portfolio, and the All Weather Portfolio.

As you would expect, performance varies quite a bit over time for all of the strategies. And while the chart is still quite noisy, there are some important things to note I think. If you focus on the TAA performance over 60/40, you'll notice the TAA strategies outperform for some period of time, then underperform for some period of time. Below, I've shaded periods of outperformance and underperformance for TAA:

It seems like there are four distinct period or regimes. Put into table form:

And finally, here is some hard performance data in numbers. I've compared all the portfolios to the 60/40 portfolio. Also, I've added a balanced portfolio consisting of 1/3 TAA, 1/3 60/40, and 1/3 All Weather Portfolio. Annualized returns from 1972-Oct. 2016 are shown, the average outperformance compared to 60/40, the average underperformance compared to 60/40, the percentage of time the portfolio outperforms 60/40, the worst year for the portfolio, and the number of consecutive year below 0% return.

There is a lot that can be said here. A few things I'll note. TAA strategy performance varies a lot. That shouldn't come as a surprise. And it's not the panacea that many investors seem to expect out of it. TAA outperforms for certain periods and underperforms for others. Those periods of underperformance are associated with big equity bull markets. Again should not come as a surprise if you understand how TAA strategies work. We're currently in the middle of a period of underperformance, which, if history repeats, could last a few years longer. Overall the outperformance rate for TAA is about six out of 10 years. TAA works over time by limiting downside and outperforming by a larger margin than it underperforms. Finally, maybe a balanced approach consisting of TAA, US heavy 60/40, and a globally diversified portfolio is not a bad compromise vs. an all or nothing one strategy approach.

P.S. Before I go, you may be asking is there any big difference among all the TAA strategies themselves. Do some do better than others in these various periods? The short answer is yes; there is quite a big difference amongst the TAA strategies. But that is a topic for another post.

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