Market Timing with the Motilal Oswal Value Index (MOVI)

Tactical investing with the rules detailed above.  The final tactical portfolio is reduced by 20% (this is 5 times the amount assumed for the systematic portfolio as the average no of trades in 10Y is about 5). This 20% accounts for exit loads of equity and fixed income and tax associated with equity. Remember equity was taxed like a debt fund before 2004 and will be again taxed from the current FY.

1 MOVI Timing: 10-years and 50% Equity and 50% debt (115 data points)

Top Left: The XIRR or returns are compared. Higher the better!

Top Right: The maximum fall of the portfolio from a peak is compared. The vertical axis is negative. So lower the value, the more the fall, the more the risk.

Bottom left: Standard deviation or how much the monthly returns fluctuate is compared. Higher the value, the higher the fluctuation, the higher the risk.

Bottom right: The no of months, the portfolio was continuously lower than a previous peak (underwater) is compared. Higher the no of months, higher the risk.

That is pretty good performance (return-wise), but MOVI timing, when done this way, does not exactly lower portfolio risk on a day to day basis but does decrease no of portfolio -ve returns.

In what follows, you will see graph after graph with not much commentary. This is deliberate. I prefer to let the pictures do the talking. Those who are interested will anyway look at them carefully.

2 MOVI-Timing: 10-years and 70% Equity and 30% debt

Again that is pretty decent

3 MOVI-Timing: 5-years and 50% Equity and 50% debt (175 data points)

4 MOVI-Timing: 5-years and 70% Equity and 30% debt

I would that is quite reasonable. Practically every TAA rule that I have backtested seems to have not got better returns in the recent past. Is this because the market has only moved up for the most part recently? Could be.

MOVI Timing Five Step Rules

1: If movi-90ma < 70: sell debt, invest in equity, systematically invest only in equity

2: If movi-90ma is between 70 and 90, rebalance such that equity is 80%. Also invest systematically in the same proportion.

3: If movi-90ma is between 90 and 110, rebalance such that equity is 55%. Also invest same systematically in the same proportion.

4: If movi-90ma is between 110 and 130, rebalance such that equity is 25%. Also invest systematically in the same proportion.

5: If move-90ma is greater than 130 then sell equity and invest in debt. Invest systematically only in debt.

When most investors find it daunting to follow a two-step process a 5-step process will be feared as too much work by many. Note that the actual movi rules contain more steps. Such multi-step TAA is well suited for pass-through instruments like mutual fund which do not have to pay tax and loads on each churn.

1 MOVI-Timing (5 steps): 10-years and 50% Equity and 50% debt

2 MOVI-Timing (5 steps): 10-years and 70% Equity and 30% debt 

3 MOVI-Timing (5 steps): 5-years and 50% Equity and 50% debt

4 MOVI-Timing (5 steps): 5-years and 70% Equity and 30% debt

Summary:

I think MOVI has fared quite decently in the past. Depending on how you implement rules it can either be high-risk with potential high-reward or low-risk with reasonable reward option (see the performance of MOST Dynamic Equity fund). This is, of course, true for any TAA rule. One big advantage with MOVI TAA is that the max no of months with no equity investment is quite low ~ 7-8 months. This is significantly lower than PE based timing. Please note that the systematic investing has been done with annual rebalancing. So do not assume you can leave it to chance and everything will turn out right.

What is my objective here?

Very few people are interested in posts such these. The reason I purse them is for my own satisfaction and search for a practical market timing method that will consistently lower risk and perhaps enhance reward. If you look at the number of months, the portfolio fell (negative returns) then clearly most TAA methods do well. The extra returns have also been decent. Of course on cannot guranteed that this will continue in future (in fact it has no even in the recent past). The hope is that if we lower risk, we can be calmer investors. The trouble is, most investors are lazy, worried about tax and loads and want lower risk and highe returns without effort. That I can say with certainity will not happen. Even if it does, it will be sheer pot luck.

My search continues. Many more methods to be tested.