Testing Dual Momentum in Australia

I wrote this post after getting an email from an Australian reader who had some questions about implementing TADM in Australia. If you have any questions or blog post ideas, just send me an email and I will try answer your questions and share with other readers if appropriate.

Australia presents somewhat of a unique case in the developed market world. Unlike most of the other developed markets—the United States, Japan, the U.K., Germany, France, the Netherlands—Australia does not have a diversified domestic stock market.

The MSCI Australia index, along with it's newer, more popular cousin the S&P/ASX 300 are dominated by financials and materials (the mining sector). These two categories form more than half of the Australian cap-weighted stock market.

The more stable equity categories we see in other developed markets such as consumer staples, consumer discretionary, and industrials together form a little over 15 percent of the market. The newer economy—telecoms and technology—are around 5 percent combined.

The real estate sector of the Australian stock market, at nearly 8% of market capitalization, is larger than the combined size of telecoms, technology, and utilities.

It doesn't take much to figure out that Australia is a natural resource economy with a massive, bloated housing market. Australians are soaked in debt and bound by a wildly swinging currency.

However, although Australians have a relatively narrow local stock market that has tendency to swing wildly with natural resource prices, they may still be much better off investing in a Time Averaged Dual Momentum model.

Investing Considerations for Australians

Given the nature of global markets and easy access thanks to self-directed brokerages, an Australian could simply change their currencies in their trading accounts, buy an American listed ETFs, and follow the standard TADM strategy.

That means buying the U.S. stock index (VTI, ITOT, IVV, etc.), or the Global stock index (VEU, IXUS, etc.), or bonds (AGG, BND, VGIT, IEF, etc.) depending on the TADM signal.

However, the Australian government gives tax preference to investors who hold local stocks. Investors receive a tax credit (franking offset) on dividend income paid by Australian corporations.

It is one of the reasons why Australian corporations pay a high dividend yield by global standard; the yield on the S&P/ASX 300 index is currently over 4 percent.

To take advantage of the tax benefits when investing in Australian exchange listed corporations, this backtest considers whether Australians may be better off investing in a version of Dual Momentum that considers the local index.

It is important to note that Australia's tax system also offers reductions for realized capital gains on investments which are held longer than 12 months.

Unfortunately, many of the signals in my model had holding periods less than 12 months. This means capital gains taxes for an investor following this timing strategy would be a bit higher.

The increased rates for short-term capital gains taxes can be particularly impactful when investing outside of the superannuation system.

Time Averaged Dual Momentum for Australians

In this backtest, I changed the assets for consideration in my Time Averaged Dual Momentum model to consider these three asset classes.

Equities (Relative Momentum Test)

  • MSCI Australia Index
  • MSCI World ex-Australia Index (1970-1987) and MSCI ACWI ex-Australia Index (1988-2017)

Risk-free Rate (Absolute Momentum Test)

  • 90-day Australia Bank Bills Current Yield

All the data was priced in the local currency (the Australian dollar) in attempt to reflect the true returns accrued to an Australian based investor.

It is unlikely that an international investor would see any benefits following this strategy.

As in my other TADM backtests, I did not include the impact of taxes or investment fees on the end investor.

Source: TheRichMoose.com

Time Averaged Dual Momentum (Australia) would have provided the following results for investors.

Compound Annual Return:  +11.72% (48 years)
Largest Annual Gain:  +49.47% (1979)
Largest Annual Drawdown:  -10.72% (1973)
Peak to Trough Drawdown:  -41.28% (1987-1993)

In comparison, an investor buying and holding the MSCI Australia (in AUD) during the same time period would have seen the following results.

Compound Annual Return:  +9.88% (48 years)
Largest Annual Gain:  +70.11% (1983)
Largest Annual Drawdown:  -36.98% (2008)
Peak to Trough Drawdown:  -61.91% (1970-1978)


This Australia analysis for my TADM model showed some interesting results. There is certainly an advantage in a strict numerical sense for TADM, despite using a poorly diversified, natural resource dominated local market as one of our key signals.

TADM would have provided an investor lower drawdowns on an annual and maximum drawdown basis over the past 48 years.

However, the gains of TADM over buying and holding the Australian index was just 184 basis points annually. This outperformance is not trifling, especially over long time periods.

But once the impact of higher capital gains taxes are calculated on the shorter duration trades the performance advantage of TADM becomes smaller.

We also need to consider if an Australian investor is truly better off choosing this local version of TADM compared with the standard model of investing in U.S. stocks, Global stocks, and bonds.

Some years back, Gogi Grewal posted an analysis on Gary Antonacci's blog looking at foreign investors investing in Gary's Dual Momentum (GEM) model.

When Australians followed Gary's model through converting their currency and buying the appropriate investments on the U.S. stock exchange, the results (measured in AUD) were very positive at +21.9% CAGR over about 41 years.

Although I haven't tried to recreate this backtest method on my similar but unique TADM model measured in Australian dollars, I expect the results to be similar.

The excess gain was mostly due to the Australian dollar declining in value during global recessions, showing a gain to holding U.S. dollar based investments.

While my TADM (Australia) backtest showed some positive results, I believe Australians are going to be better off following a standard Time Averaged Dual Momentum with U.S.-listed ETFs.

If you want to reap some of the tax benefits of holding the local Australian stock index, split your portfolio into two different strategies.

Invest a smaller part of your portfolio in a local buy-and-hold strategy and a larger part in a U.S.-listed TADM strategy.

It may look something like this. (Which would have returned around 14% CAGR since 1970).

Source: TheRichMoose.com

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