Columbia River – Eastern section.
This interim update of the Millikan is a checkup to make sure the portfolio is set up for 2022. The Millikan is a Relative Strength portfolio or one that operates using momentum principles, but with a larger array of ETFs available for purchase. As for performance, the Millikan ranks in the bottom third of the portfolios tracked here at ITA. Even with this low ranking, it is still outperforming its benchmark.
Millikan Investment Quiver
Below is the investment quiver for the Millikan. This quiver is setup around the principles of Asset Allocation and the Fama-French Five-Factor model. In other words, ETFs are selected to cover all critical asset classes and market anomalies. There are two asset classes I do not include and they are: Commodities and Precious Metals. I’m not a fan of either asset class.
Millikan Security Recommendations
Based on 1/12/2021 prices, the recommendation is to Hold VTI and purchase more shares of VOE. Readers will note that I have the Target Filter set to Yes. When the Target Filter is turned on, the Kipling spreadsheet looks for securities that are outperforming VTI. Since VTI is currently part of the portfolio, we continue to hold on to the 65 shares.
I’m using the BHS investing model (red arrow) with the default look-back combination (green arrow). If you have questions about any of these settings, please participate by posting your question in the Comment section provided.
Millikan Manual Risk Adjustments
Until we see what the FEDs are going to do with interest rates and we know more about voting rights, uncertainty reigns. For these reasons, I adjusted the SD Multiplier to 1.01 so the Stop Loss for VTI is 5.0%. This is a very conservative percentage that determines what TSLO percentages to use.
After the market opens, I will reset the TSLO for VTI at 3/4 x 5.0% (will need to round to nearest percent) and if 50 more shares of VOE are added to the current 50 shares, I will set a Trailing Stop Loss Order (TSLO) of 5.5% for those 100 shares of VOE.
As a reminder, here is how I use the Stop Loss percentages.
- If the ETF is a Buy, I use the Stop Loss percentage.
- If the ETF is a Hold, I set the TSLO to 3/4 x Stop Loss percentage.
- If the ETF is a Sell, I set the TSLO to 1/2 x Stop Loss Percentage.
What about the 110 shares of BNDX. When a Sell is called for, I set the TSLO at 1/2 times the recommendation or in this case, 1/2 x 1.2%. Since this portfolio is housed at TD Ameritrade and TDA does not permit decimal shares, I set the TSLO at 1.0%. Schwab permits decimal TSLOs, something I prefer.
Millikan Performance Data
The data for VTTVX and VTHRX is still incorrect and I’ve contacted the developers of the IAM software to see what is going on. For now I’ll use AOR as the benchmark and as you can see, the Millikan lags this reference by less than one percentage point.
This data shows the performance over the past 13.5 months.
Millikan Risk Ratios
How is the Millikan performing when risk enters the equation? The Jensen Performance Index is positive and the Jensen slope (0.49) is respectable. The Millikan is closing in on five years of operation.
Since 7/31/2017 the Internal Rate of Return (IRR) of the Millikan is 9.76% while the VTHRX benchmark is a mere 6.12%.
If you do not wish to be notified of new blog posts, let me know by contacting me at itawealth@comcast.net as I know some folks don’t wish to receive much e-mail.
Preparing Investments for 2022
The Elements of Investing: Part III
For the last few portfolio reviews I’ve been puzzling over the negative IRR values for both VTTVX and VTHRX. Was there a stock split or what was causing the negative values? I figured it was a data error until I went into Yahoo and looked at the price changes over the past 4 to 6 weeks. Both funds have been in decline.
In the next round of portfolio reviews I anticipate the Jensen and Treynor values will be higher as I’ve been using a higher performing benchmark.
Tomorrow the Galileo, one of four Dual Momentum portfolios, is up for review.
Lowell
Hello Lowell Thank you for your review of Milikan. In your report you stated:
………….. Commodities and Precious Metals. I’m not a fan of either asset class.
Please briefly elaborate. Thx John
John,
1. For starters, neither pay a dividend.
2. Commodities creates additional paper work at tax time. I don’t like that.
3. When comparing performance results, DBC and GLD lag U.S. Equities by a sizable amount. Not good.
If working with a Buy and Hold portfolio, including commodities and gold may make sense as they are not correlated with equities such as VTI. My Buy & Hold portfolios are primarily built around CEFs where high yield is a must. I’m not looking for low correlated securities that pay zero dividends.
In the Dual Momentum portfolios, bonds (BND) and treasuries (TLT) are used when equities are out of favor. When equities are out-of-favor we move to bonds or treasuries or TIPs. Something similar happens with the Relative Strength portfolios. Therefore, I really don’t need commodities or precious metals as low correlated diversifiers in most of the portfolios tracked here at ITA. DBC and GLD are part of the Rutherford portfolio, but I don’t see where they have added much value to that diversified portfolio.
I’ll wait for opposing arguments. (g)
Lowell
John, Lowell and all ITA members,
Assets such as Commodities and Precious Metals are included in portfolios for purposes of diversification. Returns of these assets, if separated and analyzed on their own, are not impressive and there can be logistical problems (paper work at tax time) that are, at best, annoying. However, they do fulfil the purpose for which they are intended based on Modern Portfolio Theory (MPT) i.e they reduce risk by lowering volatility. So, if an investor is not comfortable with volatility (portfolio value all over the place), then they should probably include these assets in their portfolio. The returns from the portfolio may not be better, but the risk will be lower and risk-adjusted return (e.g. Sharpe Ratio) will be higher/better.
Investors that can stomach higher volatility can probably consider the elimination of these asset classes – but there is a trade-off.
Momentum-based portfolios (at least historically) tend to avoid significant draw-downs by getting us out of equity classes with long-term positive returns in periods where the asset class is showing negative momentum – and this may be enough to persuade some investors to ignore Commodities/Precious Metals.. But this (momentum) strategy/model requires belief in the model and that the “momentum anomaly” will persist in the future – there is no rigorous proof of why this behavior should exist – just behavioral explanations of investor actions.
David
Hi Lowell Hard to find fault with your rationale. Thanks John
Lowell,
The reason that “The data for VTTVX and VTHRX is still incorrect” is because (for VTTVX) a LT Cap Gain distribution of $2.87 was paid on 28 Dec. and the NAV of the fund (and, consequently price/share) was adjusted accordingly. A similar distribution was made to holders of VTHRX. Holders of these funds did not lose money but the unit price to buy new shares has dropped due to the lower NAV of the fund. It is not clear whether yahoo and/or other data suppliers will eventually adjust prices to reflect this (“special”) distribution, that is obviously far greater than the normal dividends paid by these funds (that are used to adjust prices), but ITA are not likely to correct data from their supplier.
https://investor.vanguard.com/mutual-funds/profile/distributions/vttvx
David
Correction – should read IAM (not ITA) in last sentence above.
David et al.,
I keep searching for appropriate benchmarks. One that I’ve not used quantitatively is to use the IRR from the Schrodinger when calculating the Jensen Alpha. Dividends are adjusted in the Schrodinger IRR calculation and another reason for using data from the Schrodinger goes like this. If active management does not outperform a passive computer managed portfolio, why go to the effort.
The opposing argument is that since launching the Schrodinger, I’ve not seen a significant long-term recession. The Covid-19 Crash was too short to test the different management models against the Schrodinger performance. Why is this important? With the Schrodinger there is no downside protection whereas with the Dual Momentum portfolios there is some protection.
Lowell