This strategy is yet another type of cross-asset (or multi-asset) momentum based tactical asset allocation. This is based on a published report by Goldman Sachs on some of their funds.
This is a simplified interpretation of strategies proposed by Goldman Sachs on Global Tactical Asset Allocation. The original strategy is based on the following:
- Among six asset classes: US equity (represented by ETF S&P 500 Spider SPY), International equity (represented by MSCI ETF EFA), Real Estate (represented by NAREI ETF IYR), Commodities (represented by Goldman Sachs commodity index ETF GSG), US aggregate bond (represented by ETF AGG), cash, simply calculate the previous 12 month return at year end.
- Rank the year end returns among these 6 assets.
- Choose the top 3 assets and invest these top 3 assets for the next year in equal money amount.
The modified version replaces the aggregate bonds with US long term treasury bond fund since this represents a major asset class more comparable with the rest of asset classes. Furthermore, any asset has to have the score higher than CASH to qualify for the purchase.
In this strategy, a scoring based on FundX method, i.e. utilizes the past 1, 3, 6 and 12 months returns is used to rank the funds. The allocation is adjusted monthly.
This strategy has a parameter to input the underlying funds for the asset classes. The following are the model portfolios based on different underlying funds:
- GS FundX Funds: This portfolio tries to mimic the original Goldman Sachs' paper.
- GS FundX ETF: this is the ETF version of GS FundX Funds. It is the practical version since ETFs do not have holding period requirement.
- GS FundX Funds Include Emerging Market: This portfolio takes an additional asset class: emerging market equity represented by Vanguard's VEIEX compared with GS FundX Funds.
- GS FundX ETF include Emerging Market: Using EEM instead of VEIEX for the emerging market equity.
- GS FundX Funds More Bond Funds: This portfolio utilizes many bond funds to capture the stable fixed income investment opportunities while still maintaining the risk. Indeed, compared with GS FundX Funds, this portfolio increased about 1% return while slightly increasing the standard deviation of the portfolio. Users are encouraged to compare these two portfolios statistics by following detailed stats for GS FundX Funds More Bond Funds and detailed stats for GS FundX Funds.
- GS FundX Value Funds: This portfolio utilizes value equity funds instead of index funds based on the thinking that in the long run, value outperforms general markets. This portfolio's detailed stats is a bit favorable compared with detailed stats for GS FundX Funds More Bond Funds. Both use the same bond funds.
To summarize, the cross-asset momentum strategy is probably one of the most effective tactical asset allocation strategies. Users could change the parameter in this strategy to suit their purposes, especially by utilizing ETFs.
- Global Tactical Asset Allocation Momentum is a variation of this strategy.
- Mebane Faber, "Strategies in Tactical Asset Allocation". Seeking Alpha, November 30, 2006.