Constructing A Better Trend-Following Portfolio

Constructing A Better Trend-Following Portfolio

While diversification has long been the name of the game in investing, exactly how to go about it has always been debated, especially in this year when the traditional 60% stocks and 40% bonds split hasn’t fared too well. Now, DoubleLine Capital has put out a study touting a new approach: build a portfolio that follows market momentum as it goes up and down, a strategy known as “trend following,” according to an article in Chief Investment Officer.

The study stacked 58 various components into the portfolio’s allocation, from a wide range of equities including small-cap, emerging markets, and the S&P 500, to fixed income with U.S. Treasuries, Australian and British bonds, as well as commodities and currencies—all of which have low trading costs and are highly liquid. With the help of BNP Paribas, DoubleLine built an index using all of these elements and set up rigid controls so that the portfolio can’t tip too much in one direction. The index adds and subtracts leverage based on the volatility that might hit a specific asset, the article details.

Though its official name is the BNP Multi-Asset Trend Index, the pair of DoubleLine staffers who penned the study dubbed the index “a better mousetrap,” with its goal of catching risk-adjusted returns instead of nasty vermin, CityWireUSA reports. And the index has performed well, beating other alternatives, and returning 14% during the 2008 financial crisis. The strategy allows investors to increase diversification and see positive returns at the same time, DoubleLine maintains, and it “avoids the pitfall of going all in on any one sector or investment, a recipe for high volatility.”


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