Protective Asset Allocation by Keller and Keuning

Details

The Protective Asset Allocation strategy was developed by Wouter Keller and JW Keuning.

It’s based off their paper Protective Asset Allocation (PAA): A Simple Momentum-Based Alternative for Term Deposits.

The strategy uses dual momentum to determine what assets to hold but has a very aggressive portfolio protection mechanism in case of a market crash.

Their goal was to make an “appealing alternative for a 1-year term deposit.”

Average Asset Allocation & Recommended ETFs

Weight	Ticker	ETF Name	Sector
51%	IEF	iShares 7-10 Year Treasury Bond ETF	Bond, U.S., Intermediate-Term
6%	IWM	iShares Russell 2000 ETF	Equity, U.S., Small Cap
6%	QQQ	Invesco QQQ	Equity, U.S., Large Cap
5%	VNQ	Vanguard Real Estate Index Fund ETF	Real Estate, U.S.
5%	SPY	SPDR S&P 500 ETF	Equity, U.S., Large Cap
5%	VGK	Vanguard FTSE Europe ETF	Equity, Europe, Large Cap
5%	EEM	iShares MSCI Emerging Markets ETF	Equity, Emerging Markets, Large Cap
4%	EWJ	iShares MSCI Japan ETF	Equity, Japan, Large Cap
3%	DBC	Invesco DB Commodity Index Tracking Fund	Commodity, Diversified
3%	TLT	iShares 20+ Year Treasury Bond ETF	Bond, U.S., Long-Term
3%	GLD	SPDR Gold Trust	Commodity, Gold
2%	HYG	iShares iBoxx $ High Yield Corporate Bond ETF	Bond, U.S., Intermediate-Term
2%	LQD	iShares iBoxx $ Investment Grade Corporate Bond ETF	Bond, U.S., All-Term

Performance Metrics

All Data

10 Years

Annual Return

12.1%

Sharpe Ratio

0.88

10 Year Annual Return

4.8%

Volatility (annualized)

8.3%

Max Drawdown

-18.2%

Positive Periods

70.0%

Dot Com Annual Return

7.7%

Great Financial Crisis Return

10.6%

Trade Frequency

Monthly

Ulcer Performance Index

2.3

Annual Return

4.8%

Sharpe Ratio

0.57

Trade Frequency

Monthly

Volatility (annualized)

7.1%

Max Drawdown

-18.2%

Positive Periods

59.5%

Dot Com Annual Return

7.7%

Great Financial Crisis Return

10.6%

Ulcer Performance Index

0.8

Strategy Rules

On the last trading day of each month, calculate a momentum score for all of the assets listed above.
- The momentum score (MOM) = p0/SMA(12) – 1
- p0 = price on last trading day of the month
- SMA(12) = 12-month simple moving average
Next we determine the % of the portfolio that is allocated to the “safe” asset. For this recommendation, the “safe” asset is IEF. This is done by determining how many “good” and “bad” assets are in our list of funds. n=number of funds with a MOM > 0.
- If n<=6, the entire portfolio is invested in the “safe” asset.
- If n>=7
  - The % of the portfolio invested in the “safe” asset = (12- n ) / 6
  - The remaining portfolio is divided equally among the 6 assets with the highest MOM score.
Hold positions until the last trading day of the next month. Rebalance the entire portfolio even if there is not a change in positions.

How to Invest in the Protective Asset Allocation Portfolio

M1 Finance is the recommended platform to invest in this portfolio. Find out why.

Protective Asset Allocation Rolling Returns

	Low	Average	High
1-Year	-18.2%	12.6%	57.1%
3-Year	0.8%	12.9%	33%
5-Year	3.3%	13.1%	29.4%
10-Year	4.6%	13.3%	23.4%

Charts

Portfolio vs. 60/40 vs. S&P 500

All Data

10 Years

	Portfolio	60/40	S&P 500
Annual Return	12.1%	9.3%	10.3%
10Y Annual Return	4.8%	7.9%	12.2%
Sharpe Ratio	0.88	0.51	0.43
Max Drawdown	-18.2%	-29.7%	-50.97%
Volatility (annualized)	8.3%	9.9%	15.4%
Dot Com Annual Return	7.7%	-4.2%	-14.60%
Great Financial Crisis Annual Return	10.6%	-0.3%	-5.66%
Positive Periods	70.0%	65.8%	63.3%

**S&P 500 backtest to 1972 and 60/40 backtest to 1970

	Portfolio	60/40	S&P 500
Annual Return	4.8%	7.9%	12.2%
Sharpe Ratio	0.57	0.77	0.79
Max Drawdown	-18.2%	-20.5%	-24.0%
Volatility (annualized)	7.1%	9.3%	14.8%
Dot Com Annual Return	7.7%	-4.2%	-14.60%
Great Financial Crisis Annual Return	10.6%	-0.3%	-5.66%
Positive Periods	59.5%	68.6%	69.4%