Tranche Momentum Logic
What is the logic behind the Tranche Momentum Model (TMM)? Why use the TMM approach to build a winning portfolio? This blog is in response to several questions and comments to a Seeking Alpha article I wrote on “Momentum Applied To Swensen Six Portfolio.” The investing journey to the current TMM is a long one dating back to the days when stock commissions were very high, load mutual funds were common, and there was scant investing data compared to what is available today. A lot of reading led me to where I am today as an investor. Before continuing too far in this post, I want to thank HedgeHunter for creating the Kipling spreadsheet which is the “headwater” for the Tranche Momentum Model. Thanks also to the back test “artists” who helped confirm the merits of the Tranche Momentum Model.
Investing is all about saving and patience. The importance of saving is illustrated in the blog titled, The Golden Rule of Investing. Take William Bernstein’s words seriously. Patience requires taking the long view and this impacted my thinking going back many years. From nearly the start of my investing life, I was a follower of the Strategic Asset Allocation Model. This is essentially a buy and hold approach advocated by William Bernstein, Charles Ellis, Richard Ferri, Roger Gibson, Larry Swedroe, Burton Malkiel, Michael Edesess, John Bogle and many others. Check out my Top Ten Investment Books. Based on writings of these authors I came up with an asset allocation plan that one can visualize using the following Dashboard.
The Strategic Asset Allocation Model
Below is the core of the Strategic Asset Allocation Model (SAA). It is possible to condense these eighteen (18) asset classes into five or six, as is the case with the “Swensen Six,” or nine or ten ETFs as is the case with the “Rutherford 10.” The SAA model is one advocated by the writers listed above, although each would vary in three ways.
- Different writers will use different securities to populate their portfolios. For example, Swensen differs from Bernstein. However, both recommend using index funds and both advocate global diversity. I still find Bernstein’s “The Intelligent Asset Allocator” a powerful and convincing read.
- The above authors will make use of different asset classes. David Swensen does not recommend Gold (GLD) or Commodities (DBC) in his “Swensen Six” portfolio.
- Different writers will set up different target ranges for the different asset classes. What is shown below is one example of target percentages. For example, 27% is the target for Large-Cap Blend (VTI) while 5% is allocated to International REITs (RWX).
The Tranche Momentum Model
Migrating from the above SAA Model to the Tranche Momentum Model (TMM) is not a big step. Both models require selecting a core of securities that are used to populate the portfolio. I use the SAA Model with several portfolios on this blog. The oldest one with detailed data is the Schrodinger and since late 2000 this “static” portfolio closely follows the performance of VTSMX and VFINX, two investable benchmarks. Be sure to read this blog on benchmarks.
The step from the SAA Model to TMM is backed by Gary Antonacci’s research. Check out his book, Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk. The Tranche Momentum Model is one step away from the Dual Momentum Model in that we use more securities, different look-back periods, and several additional technical indicators to reduce portfolio risk and increase return. Many examples of the TMM can be found on this blog by using the search engine. Search for “tranche” or “tranche momentum” and you will find additional information. Tranche modeling is our way of reducing the luck-of-review-day.
We use different look-back periods compared to the one-year look-back advocated by Antonacci. Check this blog for some of the reasoning and for more evidence, search for How “Robust” on this blog. This link will get you started.
Examples of the Tranche Momentum Model can be found by following these portfolios: Curie, Newton, Einstein, Kepler, Bohr, Gauss, and Huygens.
Are there any negatives to the TMM? Here are two primary ones from my experience.
- In taxable accounts there is a tax penalty to be paid for not holding a security longer than one year. My “back of envelop” calculation says that one needs to add 2% annually to the portfolio to outperform a buy and hold strategy. That is a heavy lift. However, let bear markets hit, as they did in the mid-1970s, again in 2002 and yet again in 2008 and early 2009 and it does not take many of these to offset that 2% annual tax requirement.
- The Tranche Momentum Model struggles in sideways markets. It is not 100% full-proof. Is there an investment model that always works? The TMM is an investment model that is probability driven so it it works 60% or 70% of the time we have a winning edge.
The goal is to come up with a “robust” portfolio management model that provides an investment edge. The TMM does that in that it filters out most of the market noise while enhancing the signal.