By Will Hepburn
January 25, 2010
Do You Know the NAAIM Number This Week?
The NAAIM Survey of Manager Sentiment turned 3 years old last year and I took the opportunity to apply the three years of data we had developed to a more-active form of rebalancing that I call Adaptive Rebalancing.
In October, Hepburn Capital published a study called Using Adaptive Rebalancing to Bridge the Gap between Strategic Asset Allocation and Tactical Asset Allocation. This study is intended to provide a tool that the average investor or planner could use to more effectively guide their asset allocation decisions.
It is also intended to show off NAAIM and our collective expertise to the rest of the world as interested investors find their way to our website to see what the pros are doing with their equity allocations.
We started the Survey to promote NAAIM, and this next step is a way to capitalize on the great foundation we have built with the Survey.
This idea behind Adaptive Rebalancing involves adjusting a basic 60/40 mix of stocks and bonds to the NAAIM number on a quarterly basis. The NAAIM Number is the branded term that refers to the average of all member responses to the weekly survey and equates to one data point on our Survey graph.
The Study we conducted involved a quarterly rebalancing and comparing performance of the industry standard 60% equity allocation to an equity allocation matching the NAAIM Number. The balance of the portfolio is allocated to bonds.
In the study we used the S&P 500 and Barclay’s Aggregate Bond Index (AGG) for our allocation categories and had no allocation to cash.
Tactical Asset Allocation using the NAAIM Number equity allocations proved itself to be superior to the fixed ratio Strategic Asset Allocation model in every metric measured for the three year period ending September 30, 2009.
Nominal returns increased from a 3-year loss of .56% for the 60/40 mix to a 9.06% gain using adaptive rebalancing TAA over the three year period of the study, providing an annualized increase of 3.2% per year.
On a risk adjusted basis, the increase in returns was even more striking since virtually every risk measurement – Sharpe ratio, standard deviation, ulcer index and even maximum draw down – shows dramatically reduced risk of holding stocks using the NAAIM allocation.
Maximum drawdown (Q3 2007 through Q1 2009) was reduced by half, from -27.18% to -13.65%, by adapting TAA rebalancing using the NAAIM allocation.
Significantly, the NAAIM allocation was profitable in the 4th quarter of 2008 during the stock market crash associated with the banking crisis. It is believed that many investors would have welcomed positive performance in that market environment.
This study strongly supports the premise that investors who want greater returns with lower risk should consider adaptive rebalancing of their portfolios.
The study takes only a few minutes to read. It and the quarterly updates may be seen at www.HepburnCapital.com/PR/Adaptive_Rebalancing.pdf. Before long we will be posting them on the new NAAIM web site, too. (UPDATE 7/1/10: Please see this link for current & historical trends: http://naaim.org/naaimadsenttrend.aspx.)
A number of media outlets have picked up on this idea and are beginning to provide the NAAIM number as a service to their readers and subscribers.
I personally think that branding the results of our weekly Survey by calling it the NAAIM Number will give it better visibility. I can imagine writers and commentators on TV someday referring to the NAAIM number like they do so many other indicators, providing us one more way to put NAAIM on the map.
So in the future if you hear the term NAAIM Number bandied about you can say to your clients that you provide input for the very valuable indicator. All NAAIM members are welcome to provide data for the Survey. It takes me about 20 seconds per week. Talk to Susan if you would like to participate in this exciting project.