Seeking Simplicity

I wanted to see if there were any momentum equity factor funds that were trading through the Financial Crisis. The momentum funds I am familiar with were not around back then. The Invesco Dorsey Wright Momentum ETF (PDP) started trading in March 2007.

In the 10 months ending at the low on March 9, 2009, you can see it was down a little worse than the S&P 500. From it's peak of $26.23 on 10/31/2007 it went down $10.73 on 3/9/2009.

Here's how three momentum funds including PDP did during the 2020 Pandemic Crash.

That's only month end data for February and March of that year. If you eyeball the same info on the Yahoo chart, it's clear SPMO did better by 300-400 bp but you can't get exact percentages. Here's the slower decline of 2022.

And here's the year by year of all three compared to the S&P 500 for as far back as we can go.

Momentum funds are not a panacea. SPMO has consistently outperformed but can't always be counted on to do so. PDP has had a couple of good years, been close either way a couple of times but has had two, possibly three, real stinkers. MTUM isn't bad but isn't too inspiring either. 

All of that about momentum is a preamble to an exercise to create a portfolio that is a little simpler than we've been looking at lately but that hopefully has robust outcomes. You can decide whether these achieve that objective or not.

The names of the portfolio have the equity exposures but all three weight 50% simple equity. All three have 15% in Standpoint Multi Asset (BLNDX) which ostensibly brings in managed futures but I think thinking of it as all-weather, which is how they position the fund, might be more accurate. There's 30% split evenly between three different absolute return-type strategies (horizontal lines that tilt upward). The three don't really matter, the point is picking strategies that deliver the same type of result in completely different ways. All three though are single strategy, there's very few moving parts so they're easy to understand. Finally there's 5% in BTAL which is primarily a first responder defensive fund but has also delivered second responder attributes too. 

Although not included in the back test, I would think about 1% into asymmetry like maybe Bitcoin. Backtesting Bitcoin doesn't work very well. If we start when BTCFX started trading, it would add nothing because it went on a roundtrip to nowhere through October 31. It might look different after we get November data added to Portfoliovisualizer. If we use spot Bitcoin, that throws in a 305% lift in 2020 that may not be repeatable. 

Portfolio three includes a defense contractor for some alpha in certain types of crises. I've owned NOC for clients for 20 years so I just stuck with that one. I've talked about CBOE plenty. I believe it's a muted proxy for the VIX because that is where the VIX complex trades so it is a way of sneaking in a little long volatility exposure. VIX funds are first responder defensives but the bleed of most of them when there's no crisis is pretty rough. 

For a little more color, NOC is not currently in SPMO and CBOE only has a 0.13% weight so not much duplication. These two names are not my favorite stocks, I don't think I have favorites, I own them and included them today for the attributes I think they deliver.

Over the long term, they've done well which of course I'm thankful for and they are a great argument for ergodicity, but is is clear from the chart that they are capable of lagging for long periods of time especially toward the middle of the chart and this year for NOC. Nothing can always be best. 

The respective Calmar Ratios for Portfolios 1, 2 and 3 are 0.96, 0.69 and 1.42 versus 0.17 for the S&P 500. For Calmar, higher is better. The respective Kurtoses are -0.70, -0.19 and -0.41 versus -0.05 for the S&P 500. For Kurtosis, lower is better. 

You can play around with the idea and come up with other ways to get a similar output but I think of this as mostly simple tools to get what looks like a pretty robust back test. The risks include some sort of hideous run for SPMO for whatever reason (specifically not trying to guess what would cause that). Any of the absolute return vehicles could have something bad happen but I did diversify them such that it would be extremely unlikely that something bad happened to all three at the same time. The way BLNDX is put together, the risk is more like a very bad short period, which has never happened in almost five years of trading, as opposed to a multi year, serious fall off. 

Since I didn't mention it elsewhere, BLNDX and BTAL are client and personal holdings.  

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