Over the sample period (January 2000 through June 2022), the IC (MA 12) portfolio outperformed the 10-Asset EW portfolio by 1.5% a year. To determine what asset allocations advantaged the IC portfolio, we can decompose the return drivers in two different ways.
First, we can take the arithmetic difference in the return contributed by each asset class to the two portfolios. This method shows large excess return coming from commodities (33.1%), developed ex US equities (29.8%), REITs (19.6%), and high-yield bonds (21.6%). From this perspective we see the inflation cycle signal earns its returns from high-risk assets without increasing the portfolio’s equity beta over time.
A second approach is to decompose the returns of the two portfolios using the Brinson model, specifically the Brinson–Fachler (1985) method, which accounts for asset returns relative to the overall return of the benchmark (i.e., the 10-Asset EW portfolio) and isolates profitable asset allocation decisions relative to the opportunities presented by the other assets. Because both portfolios hold the same assets, excess return attributed to security selection is zero. The decomposition to asset allocation return, however, yields interesting results. The Brinson decomposition shows that the IC (MA 12) portfolio not only profits from inflation-sensitive assets, but also tactically allocates to US core bonds when profitable to do so. Armed with this information, we can take a closer look at timing.