Dual Momentum: Can I Use An All-World Fund Instead?

I've been wondering about the relative momentum aspect of Gary Antonacci's Dual Momentum strategy for some time now. Does the relative momentum component add a meaningful return to the strategy if you look at the entire world stock market?

To refresh memories, Dual Momentum considers the two main aspects of momentum. Relative momentum is comparing one asset to another asset when both are in the same broader asset class. This can also be called relative strength, or cross-sectional momentum. In the Dual Momentum strategy, we compare U.S. stocks to International-ex U.S. stocks when measuring relative momentum. For those that are curious, U.S. stocks are approximately 80% correlated to International stocks over the past few decades.

The second momentum component is absolute momentum. Absolute momentum is also called time-series momentum. This compares one asset's price now to the price at a prior specified time, such as the performance over the previous twelve months. If the asset has a positive return in excess of the risk-free rate of return (represented by short-term government debt), then the asset it can be said to have positive momentum.

Absolute Momentum Only Studies

Gary Antonacci has done comparisons using absolute momentum himself. But interestingly the only comparisons I can find use a single component: either the absolute momentum of U.S. stocks, or the absolute momentum of International stocks.

Both of these types of absolute momentum under-performed Dual Momentum—but that makes sense. Sometimes U.S. stocks do better than International stocks for a period of time and sometimes they don’t. In the long run that means poorer performance if you only use one of these two assets.

What I couldn’t find is an absolute momentum back-test, using Gary Antonacci’s standard twelve month look-back, on Global Stocks as a whole (represented by the MSCI World Index before 1988 and MSCI ACWI All County World Index after 1988).

Since it piqued my curiosity, I decided to do a long back-test. I call it the Global Stocks Absolute Momentum strategy. I had to use 1970 as a start date since I could only find global stock index information going back that far.

For global stocks, I used the MSCI World Index from 1970 through 1988 and I used the MSCI ACWI from 1988 onward. Unlike the MSCI World Index, the MSCI ACWI includes emerging markets as well. Prior to 1988, it's very difficult to obtain good data on emerging markets.

For bonds I had some difficulty locating good monthly data. While the bond rates information is out there, rates on bonds—especially medium term or longer—do not translate easily to monthly performance. So I used U.S. T-bill data from 1970 through 2004 and the ICE 7-10 Year Treasury Index from 2005 onward.

While the bond data issue would have a small effect on returns, it shouldn’t be that significant. (If anyone has and can legally share good bond index monthly data that goes back to the 1970s, please let me know and I will tweak my spreadsheets.)

My Hypothesis

My idea in doing this study was to test if there was a meaningful advantage in the relative momentum aspect of Dual Momentum when testing the strategy using better stock data.

While U.S. stocks only, or International stocks only, would clearly show a less favorable result, the issue with this comparison is that you only are looking at one-half of the equation.

When comparing global stocks as a whole, you are looking at the performance of both U.S. and International stocks in a single package.

As many of the trades in Dual Momentum involve a switch from U.S. stocks to International stocks, and U.S. stocks are quite highly correlated to International stocks, my theory going in was the results of Global Stocks Absolute Momentum would be slightly lower performance than Dual Momentum with a lot less trades.

In theory, when U.S. stocks perform better than International stocks, the MSCI World/ACWI indices should go up as a whole somewhere in the middle of the performance of the two asset groups. Likewise when International stocks outperform U.S. stocks. Also, when one stock market group falls, the other tends to follow soon after.

The Results of GSAM

GSAM Logarithmic Scale 1970-2017. Sources: TheRichMoose.com, MSCI Inc., ICE (Interactive Data LLC), FRED (Federal Reserve Bank St. Louis)

After compiling all the information and synthesizing it in a nice spreadsheet, the results are in:

Eliminating the relative momentum component and comparing only Global Stocks to bonds is not a good idea if you're looking for comparable performance to Dual Momentum.

GSAM tended to do somewhat worse than Gary’s Dual Momentum (GEM) model in nearly all years. In up years, the gains were not quite as high and in down years the drawdowns were a bit worse.

Performance of GSAM vs. Stocks Only

Still, Global Stocks Absolute Momentum produced a tidy 10.28% compound annual return from 1970 through 2017.

This nicely beat the 8.04% annual return of the MSCI World and MSCI ACWI indices over the same time frame.

The worst year for GSAM was 2011 with a -13.98% return. The best year was 1986 with a 42.81% gain.

This compares to stocks only which would have seen the portfolio fall -43.5% in 2008. The peak to trough decline of stocks by end-of-month data from 2007-09 was -56.22%.

GSAM’s drawdowns were much smaller than investing in stocks only and the out-performance was amazingly consistent over the decades.

The results of GSAM clearly showed better performance than a global all-stock strategy.

$100 invested in January 1970 would have grown to $9,900 on December 2017 following the GSAM model. That is more than double the performance of global stocks only which would have grown to $4,260 in that same time period.

Performance of GSAM vs. Dual Momentum (GEM) Strategy

While Gary Antonacci only has his Dual Momentum performance tracked back to 1974, the results of Dual Momentum are unequivocally better than GSAM. GSAM produced an average annual return of 10.28% compared to Dual Momentum’s 17.5% annual return.

That 7% difference every year adds up significantly over time. Over a typical person’s 35 year timeline of investing, if they save $1,000 a month, that’s the difference between ending up with $3.6 million instead of $20.8 million. Yes… you read that correctly.

As in Dual Momentum, GSAM’s drawdowns were much smaller than investing in stocks only.

However, GSAM had somewhat larger drawdowns than Dual Momentum—something that surprised me a little.

The drawdown aspect may have something to do with the bond data issue, but I don’t think the difference would be too significant with better data.

One thing the GSAM backtest did show, as suspected, was a lot less trading than Dual Momentum. On average, GSAM has less than 1 trade per year. That is nearly half of the trades made in the Dual Momentum strategy.

While the overall performance was not as good as Dual Momentum, GSAM still has its merits when compared to a simple buy-and-hold Couch Potato strategy. It’s easy to execute, the drawdowns are quite minimal, the strategy is simplistic, and you get decent results.

Unfortunately my hypothesis was only partially correct. If I had to choose between Dual Momentum and GSAM, I would easily choose Dual Momentum. The 7% difference in annual returns is just too high; a 2% or 3% difference might be acceptable if reducing trades was important to you.

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7 Replies to “Dual Momentum: Can I Use An All-World Fund Instead?”

  1. Kober.Paul says: Reply

    Thanks for the analysis.

    Even though US and World ex US markets are correlated, your results are NOT surprising. The reason is one of the main reasons for the difference in performance between US and World ex US is changing dollar strength relative to global currencies (Gary mentioned this several times in the book BTW). In a raising dollar environment, US market does better. In a falling dollar environment, it is good to be in World ex US if you are a US resident. GEM captures this very well. GEM also takes advantages of the fact that US typically is leading the rest of the world economy. That is one of the reasons why you look at US market performance to exit stocks, but at that time you may actually be holding World ex US.

    But it is good see your analysis. It increases my confidence in GEM.

  2. Thanks both. One question is what to do when you’re not in the US (I’m in the UK). Comparing UK vs Rest of the World might be the answer, but then we miss the opportunity to invest in the US market when it “leads” the world. Perhaps the comparison should be 3 or even 4 indices – but then we start to lose the simplicity of GEM.

    1. Daren (Editor) says:

      Keith, I would not increase the number of indices to include the UK as a separate measure. You have the same problem we have in Canada, namely that our local index is not broad enough to stand on its own for the purposes of Dual Momentum.
      It would probably be best to choose low cost ETFs for USA and International stocks, but when the signal is on cash use a UK bond fund.
      For equities you may also consider converting GBP to USD and buy US listed ETFs (instead of choosing locally listed ETFs). This decision would depend on transaction fees and management fees on locally listed ETFs vs US listed ETFs.
      Hope that helps!

  3. Thanks for the reply. This is by far the most comprehensive site covering DM, other than Gary A’s own writings of course!

    Investing in overseas listed ETFs incurs extra trading costs and taxes in the UK. But I wonder if you could do a separate post on how US vs non-US performance is influenced by movements in the dollar. It makes sense but is an overlooked aspect of the strategy. How it affects things for us non-Americans is even harder to grasp!

    1. Daren (Editor) says:

      Have you read the blog post on Gary’s website: Dual Momentum for Non-US Investors? There’s some information on there specific to the GBP as well. The other author on that post, Gogi Grewal, used to have his own website with a wealth of information on it. I don’t think it is live anymore unfortunately, but maybe his archived content will pop up somewhere in the future.

  4. If I am looking to implement TADM in my RRSP using US listed ETF’s (for the cheaper management fees and to avoid foreign withholding tax) which 3 would you recommend for the relative and absolute momentum analyses (US & Developed Equities and Short-Term Bonds?)

    1. Daren (Editor) says:

      For U.S. equities: ITOT, VTI, SCHB
      For International equities: VEU, IXUS
      For bonds: BSV, VGIT, ISTB, SCHO

      These are just some examples, you can use any low fee ETFs.

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