Protecting Capital Though Dual Momentum Portfolio Management

Dual Momentum is an investment strategy developed and made popular by Gary Antonacci. This article walks readers through the process I use when reviewing and updating Dual Momentum [DM] portfolios. This analytical model includes a few deviations from the classic DM investing model.

Dual Momentum Investment Quiver

Below is the investment quiver used with this DM approach to investing. The three basic asset classes are: U.S. Equities (VTI), International Equities (VEU), and Aggregate Bonds (AGG). In addition to AGG, I’ve added two more ETF options to AGG for times when equities are out of favor. Those two ETFs are TLT and LQD. These last two securities are minor changes from the classic DM model.

Dual Momentum September Recommendation

Based on 9/9/2020 prices, the recommendation is to invest 100% of the portfolio in U.S. Equities (VTI). The following worksheet is from the Kipling spreadsheet. The red arrow on the right identifies the DM model, one of several models available for portfolio management when using the Kipling.

The black arrow on the left of the worksheet identifies the look-back periods used for the investment recommendation. Instead of using a full-year look-back, as is the case with the classic DM model, I am using a 60- and 100-trading day look-back combination. A 50% weight is assigned to the 60-day period while a 30% weight is tied to the 100-trading day period. The remaining 20% is assigned to volatility where low volatility is rewarded.

With these settings, the current recommendation is to invest 100% of the portfolio in VTI. Prices are updated at the end of the month or every 33 calendar days. This recommendation is based on 9/9/2020 data.

Portfolio Performance Data

The following data runs from 4/30/2017 through mid-morning of 9/9/2020. April 2017 is the earliest for which I have data for this commercial portfolio tracking program. Over this period, this particular Dual Momentum portfolio has an Internal Rate of Return of 10.2% while the Time-Weighted Rate of Return for the Vanguard Target Retirement 2030 Fund (MUTF:VTHRX) index benchmark is 7.9%. These figures are for a real portfolio, not a fictitious portfolio. Several other Vanguard Target Index Funds are also shown for additional portfolio performance comparisons.

While the following data provides performance information, it does not explain what risks were taken to achieve these results. For that information, we move to the next screen where several risk ratios are available.

Portfolio Risk Ratios

The following risk ratios are a new addition to the Kipling spreadsheet so the information is limited. The September data will be updated at the end of the month. The reason for including this data is so the money manager gains some understanding of how the portfolio is performing based on a few risk measurements.

Of the following five ratios, my favorites are the Sortino and Jensen’s Alpha. The Treynor is too volatile, particularly for Dual Momentum portfolios as the portfolio beta varies widely depending on if the portfolio is invested in equities or bonds/treasuries.

The goal is to keep all risk measurements above zero as is currently the case. Once a full year of risk data is available, one will gain a clearer picture of how the portfolio is performing based on the inherent risks.

While the Dual Momentum model is designed to move out of equities and into less volatile securities during market draw-downs, I add one more capital protection anchor to the mix. Once an investment is in place, I then set a trailing stop loss order (TSLO) for the holding. In this portfolio, I have a 6% TSLO set for VTI. Some managers will use a specific stop loss price value. I prefer to use the TSLO as that allows for future growth with the sell point rising under the security, should it continue to rise in price. Setting the TSLO is the final capital protection application.

Disclosure: I am/we are long VTI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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