Conclusion, Investment Implications, Strategy
This report shows that a blend of our offensive SEAF Model and defensive Correction Protection Model can potentially create a methodology to capture the performance of the S&P 500 with significantly less risk. Moreover, adjusting the percentage of capital invested in each individual Asbury model can customize the risk and performance characteristic of the blended model to more closely meet the personal needs and objectives of different investors.
Blending Data-Driven Models: SEAF & CPM
Asbury Research’s data-driven models provide different approaches to the market. The Correction Protection Model (CPM) is a defensive model designed to protect your capital, while our SEAF (Sector ETF Asset Flows) Model is an offensive model that follows the money around the 11 sectors of the S&P 500 to find opportunistic places to invest. The question many investors have for us is “How should I be allocating these models within my portfolio? Or, more specifically, how much capital should I allocate to each model?”
Through quantitative backtesting, we have set out to provide a formula to combine these models into one “blended SEAF/CPM portfolio” that may provide a more comprehensive fit into the equity allocation of your portfolio. We began by aligning historical returns of the market to our blended portfolio, setting a baseline allocation split to allow for an apples-to-apples comparative view of the underlying stats.
The yellow highlights in the table below show that we have effectively matched the annualized total return of the S&P to our SEAF/CPM portfolio. This is done via a 57% SEAF / 43% CPM split of capital, which provides the opportunity to participate in the SEAF Model’s offensive ability to “follow the money” around the sectors of the S&P 500 while also utilizing CPM’s ability to protect capital by limiting drawdowns.
SEAF / CPM Blended Portfolio
Editor’s Note: Detailed explanation of the metrics and terminologies used in the table above can be found at investopedia.com.
With the usual caveat that past performance does not guarantee future returns, this blended model portfolio provides some insight into how a blend of different models can potentially provide a better result. The green highlights point out that this blend of SEAF and CPM provides better risk protection and risk-adjusted returns than the S&P 500 according to a number of metrics including maximum drawdown, standard deviation, Sharpe ratio, and beta while producing a comparable return to the S&P 500 — basically the potential to risk less to participate in the same upside.
This blended portfolio of Asbury Research models highlights a rough spectrum of opportunities for this model portfolio via the statistics. A higher percentage allocated to SEAF in the blended portfolio will get you closer to the pure SEAF performance numbers. Imagining the percentage invested in each portfolio as a toggle bar, a higher level investment in SEAF provides a higher upside for return, which is paid for by a higher risk profile. CPM in this case is used as a risk dampener or capital preservation tool. When a bearish market looms, this portfolio blend will keep some of your capital safe when CPM is Risk Off, while still seeking relative outperformance opportunities via the SEAF Model.
Disclaimer: This data is provided for information purposes only and is not intended to be a solicitation to buy or sell securities. The performance indicated from back-testing or hypothetical results may not be typical of future performance. No inferences may be made, and no guarantees of profitability are being stated by Asbury Research LLC. The risk of loss trading in financial assets can be substantial. Therefore, you should carefully consider whether such trading is suitable for you in light of your financial condition. We suggest that subscribers consider all of our research, not just this model or any single indicator or metric, when making decisions that affect their portfolio.