Long Run Performance of Currently Popular Allocation Strategies

How would currently popular asset allocation strategies have performed back to the end of 1925? In their January 2023 paper entitled “A Century of Asset Allocation Crash Risk”, Mikhail Samonov and Nonna Sorokina test the following seven widely used asset allocation strategies back to 1926 using a combination of actual and modeled returns for many asset sub-classes and factors:

1. U.S. 60/40 – 60% U.S. large caps and 40% U.S. aggregate bonds
2. Global 60/40 – 60% global stocks and 40% global aggregate bonds
3. Diversified Multi-Asset – 60% to equity asset classes (15% U.S. large caps, 5% U.S. small caps, 5% U.S. growth, 5% U.S. value, 10% U.S. REITs, 10% international developed markets, 10% emerging markets); 34% to fixed income (8% 10-year U.S. Treasuries, 8% U.S. municipal bonds, 8% U.S. investment grade corporate bonds, 5% international bonds, 5% emerging market bonds); and, 6% to commodities.
4. Risk Parity – 33% of portfolio risk to each of U.S. large caps, 10-year U.S. Treasuries and commodities, leveraged to 11.4% target volatility (the retrospective volatility of U.S. 60/40).
5. Endowment – per the 2020 National Association of College and University Business Officers report, 13% U.S. public equities, 13% non-U.S. public equities, 7.3% global equities, 13.5% private equity, 9.3% venture capital, 20% hedge funds, 12.3% fixed income and 11.1% real estate (with further breakdowns to sub-classes within these classes).
6. Factor Investment – 70% U.S. 60/40 and 30% equally to 15 factor premiums.
7. Dynamic Asset Allocation – either U.S. large cap stocks or U.S. aggregate bonds based on higher trailing 11-month returns, leveraged to 11.4% targeted volatility (retrospective volatility of U.S. 60/40) using 5-year rolling volatility (as in “Momentum in a Mean-variance Optimization Framework”).

They gather commercially and academically available asset return series. They extend series for 23 sub-asset classes and 15 long-short factor portfolios back to the end of 1925 based on similarity arguments and known-versus-extended return/volatility/correlation comparisons. They update all portfolio allocations monthly. They ignore rebalancing frictions, shorting costs, leverage costs, other costs of complex portfolio maintenance and administrative/management fees. Testing the seven strategies on actual and modeled data during December 1925 through December 2020, they find that:

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