The Quattro Components --> | SuperModel | Long-Bond Yield | Cash/Equity | Big MAC |
Also see this research      --> | Super-charge your Quattro performance |

Ever wanted to run a fund from the comfort of your own home? The Quattro Composite Investment Portfolio model is an equal-parts combination of our 4 main SA TOP40 investment timing models, namely SuperModel, LBYC, Cash/Equity Yield and Big MAC. The combination creates a strategy with favourable "funds like" qualities.

The introduction of the 4 separate investment grade long-term timing strategies introduces three major benefits to the long-term investor namely :

(1) model diversification and
(2) staged asset-allocation guidelines and
(3) favourable "portfolio effects"

The strategy is long-only, moving into cash when out the market.

1.Model Diversification
Each of the 4 components of the Quattro model use varying econometric and technical measures to decide when times are the most favourable to be invested in the JSE. No model is perfect or can guarantee to work well into the future and thus the deployment of multiple models in equal parts spreads our "model risk" around. If one model should "lose its mojo" or not optimally time the market then it is only likely to effect 25% of our portfolio.

2.Staged asset-allocation
As each of the Quattro components goes long on the JSE, the investor phases in a further 25% of his funds into the market. As conditions become more and more bullish and more models enter the market, the investor will place more funds into the market until fully invested. This offers a risk adjusted approach to asset allocation. The idea is that when all 4 models are firing, things have to be very bullish all-round and we will be 100% invested. Similarly as more models move into cash as things become more bearish, the investor phases more of his capital into cash. The chart below, called a "Diffusion Index", merely shows how many of the 4 models were long on the JSE over the last 15 years. With each step up in the index, we allocate 25% more free cash into the JSE:


3.Favourable "Portfolio Effects"
There are favourable "portfolio effects" to be gained by using a equal-parts combination of the 4 main PowerStocks long-term timing models. The equity curve of the combined portfolio has better standard deviations, drawdown profiles, sterling ratios and gain/loss multiples than any of the individual components. More specifically, when dividing the compound annual growth of each strategy by the annualised daily standard deviations for negative daily movements, we arrive at the Sortino ratios as shown below:

According to modern portfolio theory, low Sortino ratios are bad (such as that for the JSE buy & hold strategy) and Sortino ratios above 2 are very good, indicating highly favourable risk adjusted returns. It means the returns were achieved with low negative fluctuation in the equity curve. The Quattro portfolio has a higher Sortino ratio than any of its individual components and still manages to achieve a compound rate of growth that beats at least two of its underlying components.

4. Quattro Components (as at 10 Sept 2012)
We will now do a side-by-side recap of the 4 Quattro components:








5. Total Return Indices (Equity Curves)
The TRI's for each strategy is shown below. We assumed no leverage, a starting capital of R1.00 and interest earned on cash at prime less 5%

Whilst the Quattro "Fund" may not be the best performing in total returns, remember it has far superior risk-adjusted returns qualities due to its model diversification, staged equity allocation and "funds like" portfolio qualities (high Sortino ratio).

It needs to be pointed out that the long term timing models rarely beat the buy & hold performance in bull markets. Their main out-performance comes from being in cash during major bear markets and recessions. You need to span 2 business cycles to start realising the main benefits of this sort of market timing. The main aim of these models is protection of capital in bear markets and capture of 80% of the upside in bull markets.

However, should you wish to beat the buy & hold during bull markets, you can deploy leverage. Our research shows that leverage between 1.5x and 2x offers the best results. Beyond these levels, the volatility of returns becomes rather unbearable and interest charges on the loan portion of the leveraged trade starts to erode returns significantly (remember these are quite long trades.) What this means is that if you have say R100,000 allocated to each model and the diffusion rises by 1 then you deploy R150,000 to R200,000 into the market using TOP40 CFD's or Single-stock futures.

The Quattro strategy does not short. It is a long-only strategy. However, if the diffusion index is on zero (bearish macro conditions) then you can follow the HedgeTrader strategy for shorting the market. We do not recommend shorting with more than 25% of your available capital.

The Quattro Components --> | SuperModel | Long-Bond Yield | Cash/Equity | Big MAC |
Also see this research      --> | Super-charge your Quattro performance |
 
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