Model Portfolios

Dual Momentum Investment Strategy

Dual Momentum is a timing-based investment strategy, pioneered by Gary Antonacci. Dual Momentum is very simple to execute, it is very robust over time, and can be easily implemented by any investor with a self-directed investment account.

Dual Momentum is a great strategy for use in all accounts, including RRSPs, TFSAs, RESPs, and non-registered accounts. The strategy is very easily to implement with low-cost index ETFs or index mutual funds.

In Dual Momentum, the investor considers the past 12-month performance of two large equity asset classes:

  • U.S. stocks (MSCI USA Index), and
  • International stocks (MSCI All-Country World ex-USA Index)

The performance of the equity assets is also checked against the risk-free rate of return over the same period. I have created a simple cash index by rolling over 3-month United States Treasury bills to represent the risk-free rate of return from month-to-month.

Dual Momentum's name is derived from the two forms of academically identified momentum factors used in the evaluation process: Relative Momentum (also called cross-sectional momentum) and Absolute Momentum (also called time-series momentum).

Based on historical simulated backtests using the indices, Dual Momentum shows incredible performance results over full equity market cycles. Since 1970, Dual Momentum drawdowns have not exceeded 25 percent while compounded annual returns have approached 17 percent.

For several reasons, my process is slightly different from the process Gary Antonacci outlines in his book on a few subtle points. At the end of the day, the results are very similar in both models.

Monthly Dual Momentum Evaluation

At the end of each month, a Dual Momentum investor will go through the following simple process which takes me approximately ten minutes.

Step 1: Relative Momentum Analysis (Cross-sectional Momentum)

In the first step, the investor will evaluate the recent historical performance of the two equity assets: U.S. stocks versus International stocks.

Obtain the total return, including dividends, for the past 12 months for U.S. stocks and International stocks.

The asset with the highest return is now the preferred equity asset.

Step 2: Absolute Momentum Analysis (Time-series Momentum)

In the second step, the investor will evaluate the past 12-month performance of the previously determined preferred equity asset against the risk-free rate of return. I use a custom index of 3-month United States Treasury bills to calculate the theoretical 12-month risk-free return.

The preferred equity asset is said to have positive absolute momentum if its 12-month return exceeded the 12-month return of the Treasury bill index.

Step 3: Determine the Dual Momentum Signal

If the preferred equity asset has positive absolute momentum, the investor invests their entire Dual Momentum portfolio into a low-cost index fund which best represents that asset class.

If the preferred equity asset has negative absolute momentum, the investor invests their entire Dual Momentum portfolio into a low-cost bond fund.

Step 4: Make the Trades

More often then not, the Dual Momentum signal will be the same from month-to-month. This means the investor will not be making any trades at all.

However, on occasion the signal will change compared to the signal for the previous month. If this is the case, the investor will sell their entire current holding and purchase the appropriate new holding for the new Dual Momentum signal.

Dual Momentum Performance(1)

Dual Momentum Portfolio Statistics (1970-2017)

Compounded Annual Return:  +16.95% (48 years)
Largest Annual Gain:  +65.84% (1986)
Largest Annual Drawdown:  -7.33% (1973)
Peak to Trough Drawdown:  -25.38% (1973-1975)

Equal Weight Portfolio Statistics (1970-2017)

Compounded Annual Return:  +8.75% (48 years)
Largest Annual Gain:  +33.29% (1985)
Largest Annual Drawdown:  -18.63% (2008)
Peak to Trough Drawdown:  -26.58% (2008-2009)

Notes: The returns above use the following index data: MSCI USA Index, MSCI World ex-USA Index, MSCI ACWI ex-USA Index, FRED 3-month Secondary Market Treasury Bill, Shiller NYU Stern Database estimates for 10-year United States Treasury Bonds.

Investor results will differ when substitute indices are used. The data-set does not include allowances for management fees, taxes, transaction fees, and other investor costs. Past returns based on back-tests do not predict future, real world results.

Leveraged Barbell Portfolios

Annually Re-balanced Portfolios with 3x Daily Leveraged Stocks & T-bills

Leveraged Barbell Portfolios are simple to manage, lazy investment style portfolios which capture the long-term advantages of daily leveraged index ETFs. When daily leveraged funds are paired with a large allocation to a super safe investment, such as T-bills or shorter-term government bonds, the results are outstanding.

Over long periods of time, Leveraged Barbell Portfolios will outperform a standard buy-and-hold index portfolio in both positive return years and through the worst downturns. This is thanks to the compounding effect. When markets are climbing, daily re-balancing on leveraged funds leads to further compounded gains in most rising market conditions. When markets are falling, the daily re-balancing causes leveraged funds to shrink at a declining rate in most falling market conditions.

A key component to Leveraged Barbell Portfolios is the large allocation to super safe assets. The majority of your portfolio should be invested in shorter-term government bonds to provide stability in falling markets and ammunition when markets turn around. These assets will also generate a moderate return, providing income to the investor. Over time that bond income, even at a 3% interest yield, will grow to be substantial.

For super safe assets, I use U.S. treasury bill data in my models because it is readily available and easy to calculate. However, a 1-5 Year Government Bond Fund or a 7-10 Year Government Bond Fund would also be very effective holdings. In my analysis, 10 Year Government Bonds would have provided an extra 0.5% to 0.8% (depending on your allocation to safe assets) to your compound annual return with somewhat more volatility.

For the leveraged equities, I use S&P 500 index data (with estimated dividends) in my models. While daily data on international equities is only available going back to the mid-2000s, the model also works well in a 3-fund portfolio. For better diversification, it would be beneficial to split the leverage equity portion equally into a 3x leveraged S&P 500 ETF (such as UPRO) and a 3x leveraged MSCI EAFE ETF (such as DZK).

40% Allocation to 3x Leveraged S&P 500 & 60% Allocation to US T-bills

Portfolio Statistics

Compounded Annual Return: +15.86% (68 years)
Largest Annual Gain: +89.91% (1954)
Largest Annual Drawdown: -32.43% (2008)
Peak to Trough Drawdown: -52.9% (2007-2009)

S&P 500 Statistics

Compounded Annual Return: +11.33% (68 years)
Largest Annual Gain: +52.56% (1954)
Largest Annual Drawdown: -36.55% (2008)
Peak to Trough Drawdown: -55.25% (2007-2009)

30% Allocation to 3x Leveraged S&P 500 & 70% Allocation to US T-bills

Portfolio Statistics

Compounded Annual Return: +13.42% (68 years)
Largest Annual Gain: +67.67% (1954)
Largest Annual Drawdown: -23.63% (2008)
Peak to Trough Drawdown: -41.16% (2007-2009)

S&P 500 Statistics

Compounded Annual Return: +11.33% (68 years)
Largest Annual Gain: +52.56% (1954)
Largest Annual Drawdown: -36.55% (2008)
Peak to Trough Drawdown: -55.25% (2007-2009)

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