GTAA consists of five global asset classes: US stocks, foreign stocks, bonds, real estate and commodities.

In my previous post we had a look at "Base" case of simply buying and holding, in equal 20% weighting's, the Asset Allocation described in the paper here. In this post we will compare that "Base" performance to the implementation of "timing" described within the paper.

To begin let's revisit the "Base Case". From the back test attached below we can see that this yielded a CAGR=4.2% for a Drawdown=26.5% and a SharpeRatio=0.44 over nearly the last decade... nothing to get excited about. For comparative purposes over this same period buying and holding the SPY yielded a 13%CAGR, Drawdown=33% and Sharpe=0.79. (It's probably not fair to compare a basket of diversified assets to the outperformer of the last decade, but I think it's nice to know what an investor could have achieved had they remained 100% invested in stocks.)


In the paper, Meb Faber examines Introducing a "timing" element to his asset allocation (which is where the "Tactical" part of his GlobalTacticalAssetAllocation gets its name) as a risk mitigation strategy. By applying a 10-month (200day) SimpleMovingAverage filter to the RiskyAssets within the portfolio and allocating to cash (or mid duration bonds examined below) when an asset price falls below its MovingAverage.  It is an established fact that high volatility diminishes compound returns, and this "timing" factor is an attempt to reduce that volatility. 

His claim: "Timing results in a reduction of volatility to single-digit levels, as well as a single-digit maximum drawdown. Drawdown is reduced from 46% to less than 10%". 

Note: The filter is disregarded intra-month and only acted upon if the signal still exists at months end, hence large drawdowns could be experienced between monthly rebalancing periods.


So with that in mind, how did this SMA implementation perform over the same period as the backtest below...?