Momentum Weighted Portfolio
A modification of the Rank Weighted (RW) Momentum Portfolio described in Part 10-2 of this Study is what I have called the Momentum Weighted (MW) Portfolio. This strategy uses a proprietary algorithm to calculate allocation weights that more accurately reflect the relative momentum of the individual assets rather than the simple Rank weights as described in Part 10-2. However, although absolute percentages differ from those calculated using the RW strategy, the relative order of the allocation weights remains the same. Thus, it is a “fine-tuned” version of the RW strategy.
For consistency I have used the same rules for selecting assets (top 4 assets ranked higher than SHY) and the same restraints/maximum allocations used in Part 10-2.
The performance of the Momentum Weighted (MW) Portfolio is shown below:
Comparison of Momentum Weighted (MW) Feynman 4 Portfolio performance with Equally Weighted (EW), Rank Weighted (RW) Portfolios, VTSMX and VTTVX.
Key performance characteristics of the Baseline MW Feynman 4 Portfolio are:
- CAGR: 15.25%
- Volatility: 12.39%
- Sharpe: 1.23
- Max Drawdown: 17.76%
With the exception of Maximum Drawdown, the performance of the “fine-tuned” MW Feynman Portfolio is slightly better than the RW Portfolio but still falls a little short of the simplest EW Portfolio.
Current Allocations are as calculated below:
Asset weights as determined on 6/27/2014 for a 4 Asset MW Portfolio
It can be seen from the above figure that the order of the allocation weights is the same as generated in Part 10-2 for the RW Portfolio but that the actual percentages show less variation.
Ernest Stokely says
Thanks as always David for sharing this work. I am drawing the conclusion, which I believe you have alluded to before, that the allocation strategy is the least important of the main characteristics of this portfolio. Is it fair to say that the SHY-EWA circuit breakers and the RW momentum are the primary effectors of the success of this portfolio, and the final asset allocation and even the CW are the least important??
It is certainly fair to say that the SHY filter is the primary reason for the avoidance of large drawdowns. I didn’t look for EMA exits (the backtesting is time consuming enough without that extra complication) but I’m 95+% sure that the SHY filter dominates and kicks in way before the (195) EMA.
I am preparing additional posts that cover the same (EW, RW and MW) allocation strategies but with Cluster Analysis included to ensure diversification. I won’t disclose the results before I Post, but you will have more information on which to choose your preferred allocation strategy. However, I will say that I wouldn’t necessarily agree that CW is least important – if volatility (risk) is a big concern then CW strategies can be an important consideration. You’ll see what I mean when you see the Cluster Portfolio results.
Lowell Herr says
“…that the allocation strategy is the least important of the main characteristics of this portfolio.”
If you are referring to Strategic Asset Allocation, then you are correct based on recent information published by Michael Edesess et. al., in their new book, “The 3 Simple Rules of Investing.” Edesess debunks many of our investing principles and asset allocation is one of them. Yes, I’ve written about the importance of asset allocation for many years, but I too am beginning to alter my thinking. The draw-downs of the dot.com bubble and the Great Recess of 2008 and early 2009 focused my attention on holding on to the corpus of a portfolio and the straight asset allocation does not help in these dramatic situations.
Edesess goes through the misinterpretation of the Brinson et.al. papers – as have I over on the original blog. If I find the time, I will bring some of that material over to this blog as it is important for investors to know how asset allocation can be misused or used as a selling tool.
David Bernat says
Dear David, and all
Thanks very much for share this analysis, this is very valuable information and I am looking forward for the next chapter.
Based on my understanding, I would highlight some significant differences among the different Asset allocation outputs, and I am thinking about the max drawdown, where in equal Weighted is 12,6%, while in the Rank Weighted is about ~17%, that is a significant difference, almost 5pp. At this stage of the analysis, if I have to choose one strategy I will go for Equally Weighted Momentum.