Kepler Portfolio Review: 25 August 2022

Dahlia from Swan Island Dahlias

Of the five different investing models I use to manage and track portfolios here at ITA, the style requiring the most attention and decision making is known as Relative Strength or Relative Momentum.  The Kepler, up for review today, is such a portfolio.  Follow along as I walk investors through this process.  Keep in mind that the Kipling spreadsheet is required to use this investing model.

Kepler Investment Quiver

We begin with a portfolio made up in such a way as to cover nearly all the critical asset classes and market factors as defined by the Fama-French Five-Factor model.  Two asset classes I no longer use are Commodities and Precious Metals.  Those two asset classes are found within the Rutherford portfolio so check out blog posts that cover that portfolio.  You will find the search engine icon in the upper right-hand corner of each page.  Look for the magnifier icon.

In case you have forgotten, the Fama-French Five-Factor model includes the following:

• Market beta.  Beta is one of the factors we include in the Jensen Performance Index.  This is frequently known as the Jensen Alpha.
• Style:  Value is preferred over Growth.
• Size:  Small-cap is preferred over large-cap.
• Momentum or an anomaly we use with nearly all portfolios with exception of the Buy and Hold accounts.
• Quality or Profitability.  QUAL and IQLT are example ETFs used to cover this factor.

Readers interested in learning more about market factors or market anomalies will find Your Complete Guide To Factor-Based Investing by Andrew L. Berkin & Larry E. Swedroe of great interest.

Kepler Security Recommendations

The first three screenshots come from the Kipling spreadsheet.  The worksheet below is where many of the initial decisions are made regarding some basic settings.  For example, I have the VTI Target Filter turned on.  As a result, I am looking for securities that are ranked above VTI using the Rank column located in the 5th column from the right.  This month we have 7 Buy and 1 Hold recommendations.

I am using the BHS model or system.  There are four investing models available within the Kipling.  If you check out the Carson Trio, I am testing three of the models.  The fourth model is the Dual Momentum™ model.  Investors interested in the Dual Momentum™ model can easily implement it if you have the Kipling spreadsheet.

Kepler Manual Risk Adjustments

The following worksheet is where many of the decisions are made, and with the Kepler, I will over-ride a few of the recommendations.  For example, I will continue to hold 2000 shares of SCHP rather than sell shares and purchase shares of VTIP.  Both are inflation protection securities so I’ll continue to hold SCHP.

Until shares of VNQ are sold there is insufficient cash available to pick up shares of VTI, VOE, and VBR.  VOE and VBR are both value oriented ETFs and therefore fill one of the Fama-French factor slots.  VBR fulfills two factors as it holds small-cap and value stocks.

I have Trailing Stop Loss Orders (TSLOs) in for VFH VGT, and VIS as these ETFs were purchased when the Bullish Percent Indicators were over-sold.  After they hit the over-bought zone I placed 3% TSLOs.  Some of you have profited from this move.

Kepler Performance Data

How well has the Kepler been performing since 11/30/2020.  The annualized Internal Rate of Return is 9.9% while the AOA benchmark lags at 2.7%.  The IRR for the period since late November of 2020 is 17.8% or far ahead of the benchmark.

Kepler Risk Ratios

Readers who have been following the blog for years are familiar with the Risk Ratio data table.  Once more, pay most attention to the Jensen.  Currently, it is very high with a value of 16.2.  Any positive values bring bragging rights.  Don’t expect to see this high value maintained.

The slope of the Jensen Alpha over the past year is barely positive.  The spikes back in November and December came when the market was surging.  Once those high values are cleared we will be taking a fresh look at the slope of the Jensen Performance Index.

In general, the Kepler is performing very well when risk enters the calculations.  Few investors pay as much attention to risk as I do, but I consider it as important as return as they are intimately related.

After posting this blog I’ll begin setting limit orders to sell off VNQ and use available cash to purchase shares of VOE and VBR.