Is Gary Antonacci’s Global Equity Momentum Strategy Robust? by Severian Asset Management

Gary Antonacci’s excellent book Dual Momentum Investing is a cult hit. Its success is easy to understand. It offers a simple trading system that crushes the market in both absolute and risk-adjusted terms. Antonacci calls it Global Equity Momentum, or GEM.

Here’s how it works: At the end of each month, compare the trailing 12-month total returns of U.S. and foreign stock markets. Select the one with the higher return. If the selected asset’s 12-month total return is higher than the 12-month total return of cash, buy it. Otherwise, buy investment-grade bonds.

The strategy combines a relative momentum signal (what’s doing better?) with an absolute momentum signal (is it positive?) in a simple and intuitive manner.

Antonacci uses the S&P 500, MSCI ACWI ex-US, and Barclays US Aggregate Bond total return indexes to represent U.S. stock, international stock, and investment-grade bond returns, respectively. Here are his back-test results using different lookback windows, including trailing 9, 6, and 3 months.

GEM, 12/1973-12/2013
GEM12 GEM9 GEM6 GEM3 ACWI
Annual Return % 17.43 15.85 14.37 13.9 8.85
Standard Deviation % 12.64 12.39 11.84 12.04 15.56
Sharpe Ratio 0.87 0.78 0.71 0.65 0.22
Max Drawdown % -22.72 -18.98 -23.51 -23.26 -60.21
Source: Antonacci, Dual Momentum Investing

GEM almost doubles the annual return of the world stock index. The comparison understates GEM’s advantage. The strategy achieved higher returns with lower volatility and shallower drawdowns. What volatility GEM experienced tended to be on the upside. Moreover, the strategy was uncanny in its consistency, outperforming in almost all periods, even doing better in the past two decades. The exhibit below plots the wealth ratio of the Global Equity Momentum versus a 35-35-30 U.S.-international-bond asset allocation (the results are slightly worse against a 50-50 U.S.-international stock allocation).

Global Equity Momentum

When faced with extraordinary back-tested results, we must be extraordinarily skeptical. Good scientists look hard for disconfirming evidence, reasons to knock down a claim, not bolster it. Can we replicate the results? Do they significantly change when we use different indexes? Look at different periods?

Full article here Severian Asset Management more on book below

Dual Momentum Investing – Description

Dual Momentum Investing details the author’s own momentum investing method that combines U.S. stock, non-U.S. stock, and aggregate bond indices–in a formula proven to dramatically increase profits while lowering risk. Antonacci reveals how momentum investors could have achieved long-run returns nearly twice as high as the stock market over the past 40 years, while avoiding or minimizing bear market losses–and he provides the information and insight investors need to achieve such success going forward. His methodology, supported by rigorous academic research, is designed to pick up on major changes in relative strength and market trend.

“This is an excellent book on the various forms of price momentum and why they work, including a very clever way to use them. I highly recommend investors read this book.” – James P. O’Shaughnessy, author, What Works on Wall Street, Chairman and CEO of O’Shaughnessy Asset Management