Dual momentum with Value and Momentum factor portfolios

Dual Momentum is a robust portfolio allocation tool.  Relative 12 month returns are used to rank assets.  Shelter is sought in a safe asset when 12 month absolute returns fall below a threshold.

Gary Antonacci describes Global Equities Momentum using US and International stock indexes with Bonds as the safe asset.  Annual returns are 17.4% since 1974.  However, my previous post showed the potential return hit when the 30 year bond bull ends and prices start to fall.

One promising solution is to use factor portfolios based on Value and Momentum and shelter in a ‘Risk-Free’ asset during downturns.  Results from this strategy are not biased by recent bull markets.  Value and Momentum are somewhat uncorrelated, enhancing returns, and supported by a vast literature showing persistent outperformance  over many decades.

As the Value effect is known to apply only to small firms, I used the small-high Value dataset from the 2×3 portfolio at Ken French’s library.  The momentum anomaly is not limited to specific market segments so the big-high Momentum portfolio was used.


Average annual compound return is 16.6% and consistent throughout the 60+ year test period (see green rolling return and red annual Risk-Free%).

Return is greater than each data series individually.  Using 6 or 4 month dual momentum gives similar results.

VBR and PDP are ETFs that can be used to mimic these portfolios.  The next post will look at tracking of these ETFs relative to the 2×3 portfolios and their current momentum status.

Dual momentum without the benefit of the bond bull market

Dual momentum, popularized by Gary Antonacci, uses 12 month returns to:

  1. rank and select the top asset (RELATIVE)
  2. shelter in a safer asset if the absolute value falls below a threshold (ABSOLUTE)

Many tactical strategies use bonds as the safer asset which enhances returns in two ways.  Firstly, returns tend to be uncorrelated with stocks and secondly, bonds have risen continuously over the past 3 decades.

Here is the result using a single risky asset (S&P 500) and Long Term Treasury Bonds (data from yahoo).  Clearly, relative momentum is not used in this case.  The lower return threshold triggering a switch into bonds is the 12 month bond return.


Equity curve is in blue and 12 month rolling return in green.  Average compound return is 9.7% since 1987 using the full dataset.

Notice the flat to negative return from 2009 through 2011.


Now, remove the underlying bond trend by subtracting the average return (0.71%) from each monthly data point and recalculate:


Compound return falls to 8.3% but the majority occurs pre-2000.

This test could be performed various ways but the result above is a possibility for this type of strategy when interest rates start to rise.

NEXT WEEK: a solution.