Today I spent sometime looking into the composition of the equities in my protector alpha portfolio.
I’ve got about 5-6 different lists of equities based on mechanical/quantitative investing. I am going to trim this down to the highest performers to simplify and strengthen the portfolio in general. Some of the 5-6 are definitely under performers both in back-testing and in live trading and we’ll be doing a trim of these.
The top two performing with the strongest backtest is the Best 8 of the Minimum-Volatility sectors of the S&P and the Best 12 of the USMV (MCSI USA minimum volatility ETF). Both of these strategies originated from George Vrba at ImarketSignals.
The Best 8 universe is generally Health Care, Consumer Staples and utilities and represents anywhere from 111 to 119 stocks. Weekly, we take the top 8 of these based on certain indicators.
The backtests:
Since 2000: 10,760% vs 87.55% SPY
Last 5 Years: 369% vs 92.9 SPY
Last 2 Years: 99% vs 34.44 SPY
Last 1 year: 40.4% vs 13.91% SPY
Last 6 months: 22.5% vs 12% SPY
Last 1 month: 2.86% vs 0.14% SPY
The USMV Best 12 universe is 155 stocks and represents the lower volatility sectors of US equities. We take the top 12 of these based on certain indicators.
The results since inception (real money)
26.4% vs SPY 8.35%
The backtest for the S&P Min Volatility Best 8 is more extensive than the USMV but the results should be similar as they’re based on the same concepts and that is to benefit off of the reduced volatility of the selections and seek to benefit from low-volatility anomaly (that portfolios of low-volatility stocks have produced higher risk-adjusted returns than portfolios with high-volatility stocks). Further to this, taking the best 10-15% of that list takes that concept even further. When we’re completely hedged with SPY as a baseline, our results on the protector vs just holding SPY should be quite pronounced.
Currently, we use about 6 of these types of mechanical picks for our equities but the majority are not quite as attractive. We had some cloning, some small cap picks and other but we may just move to using a combination of ALFA ticker, Best 8 and Best 12.