Following the success of trend following on the Guardian portfolios which were launched in Feb 2020, we have decided to run trend-following algorithms across all of our portfolios.
Trend following worked remarkably well during covid in signalling an early exit from equity markets and helped to reduce volatility, maximum drawdowns and protect overall investments. (https://www.crossingpoint.co.uk/assets/documents/guardian-trend-coronavirus.pdf) We also modified our approach in the summer of 2020 in order to use quicker signals to re-enter equity markets.
After discussions with our supporting IFAs and given the current market volatility, we have decided to roll out a trend-following overlay across all our portfolios. This will mean that we will be trading
these portfolios with a higher level of frequency than we have in the
past. This will lead to increased trading costs, but we believe that these
costs will be small relative to potential losses and long-term gains. The
trend-following overlay will reduce equity exposure at times when there
is a clear signal that a market is falling. The move from equity will be to a
lower risk (safe-haven) asset, either fixed-income securities or cash. This
means that, at times, a larger portion of the portfolio could be in cash if
fixed income markets perform poorly and have trend-following signals
which recommend to be out of fixed income funds. This has been case for
the last few months as bond yields have been rising.
Advantages of Trend Following:
Reduces Volatility
Lowers maximum drawdowns
Smooths long-term returns supporting more accurate cash-flow modelling
Limits sequencing risk
Protects assets in times of market stress
Focus on positive risk-adjusted returns (higher Sharpe and Sortino ratios)
All of our portfolios will continue to have default asset allocations which will focus on growth and an internationally diversified asset allocation.
An early paper on trend following A Quantitative Approach to Tactical Asset Allocation - Mebane T. Faber (February 2013) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461 can be found at and demonstrates that when applying a simple moving average strategy to each asset in an internationally diversified portfolio of assets, an investor is able to increase risk-adjusted returns in a diversified portfolio. In addition, the investor would have also been able to avoid many of the protracted bear markets in various asset classes.
Any questions or for more information, please get in touch.
Tuesday, May 17, 2022