Dual Momentum Investing Is Not Dead

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Includes: AGG, SCHO
by: Lowell Herr
Summary

Dual Momentum portfolios outperform the S&P 500.

Dual Momentum model is risk averse.

How to tweak the Dual Momentum model.

Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk is a book by Gary Antonacci. This book and the details of the investing model hit the bookstores in 2015. It was not long after publication of Antonacci's book that I learned of the basic ideas behind Dual Momentum investing. With extensive help from an Internet friend, the DM model concepts were turned into a working spreadsheet.

Some months ago I was discouraged with the DM Internal Rate of Return results as the DM portfolios were not keeping pace with the board market during the remarkable upswing. That all changed when the risk averse benefits of the Dual Momentum model were tested in the recent draw-down.

DM calls for three asset classes and they are:

  • U.S. Equities
  • International Equities
  • U.S. Bonds

In the example below, four ETFs are listed for inclusion in this Dual Momentum portfolio. In addition to bond (AGG) I added SCHO, a U.S. Treasury, thinking a treasury ETF may provide greater resistance to a market drawdown vs. a bond ETF.

Dual Momentum Recommendation: The following worksheet is actually designed to handle a portfolio with a wide array of asset classes, but can easily be adapted to handle the simple Dual Momentum strategy. Based on data from 12/24/2018, the recommendation is to place 100% of the portfolio in short-term treasuries (SCHO).

Dual Momentum Performance Data: I currently apply the Dual Momentum model to four portfolios. The following data ranges from 7/31/2017 through 12/24/2018. The July 2017 starting date is selected as that is as far back as I have data for all four portfolios.

The combined Internal Rate of Return is 3.7% while the S&P 500 turned in a negative 3.5% annualized return over the same time frame. As a primary benchmark for the Dual Momentum portfolios, I use the Vanguard 2030 Target Index Fund. The Time-Weighted ROI for this fund is 2.5% over the period mentioned above. This fund includes bonds as do the DM portfolios in certain markets.

The recent U.S. Equities draw-down was resisted by the DM model and that accounts for the seven (7%) percentage point difference between the IRR values for these four DM portfolios and the S&P 500.

One simple tweak to the DM model is to add a treasury ETF. Another tweak is to use two different look-back periods instead of the single 12-month or 252 trading days as advocated by the original DM model. The reason for this second tweak is that it improves returns and reduces losses by catching market moves earlier.

The goal for 2019 is to maintain the differential between the Dual Momentum portfolios and the VTHRX benchmark.

Disclosure: I am/we are long SCHO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.