Defensive Asset Allocation by Keller and Keuning
The Defensive Asset Allocation portfolio was created by Wouter Keller and Jan Willem Keuning, published in their 2018 paper Breadth Momentum and the Canary Universe: Defensive Asset Allocation (DAA). DAA is a successor to Keller's earlier strategies that addresses a key structural problem: previous models kept the portfolio in cash too frequently because they used the same asset universe to both detect danger and select holdings. DAA solves this by introducing a dedicated two-asset "canary" universe that serves exclusively as a crash-detection signal, separate from the assets the portfolio actually holds.
Investment Philosophy
The canary system monitors just two assets -- an emerging market equity fund and a broad bond fund -- as early-warning indicators of broad market stress. The rationale is that these two assets have historically provided reliable advance warning of deteriorating conditions across global risk markets. When neither canary shows negative momentum, the portfolio is fully invested in the top risky assets. When one canary is negative, the portfolio is half-defensive. When both are negative, the portfolio moves entirely to the best available defensive asset. By separating the crash signal from the investment universe, DAA stays more invested during normal markets while maintaining strong downside protection when it matters.
Who It's For
This portfolio suits investors who want systematic crash protection without the high average cash allocation of earlier trend-following models. It is appropriate for medium-to-long time horizons and investors who want a rules-based framework that balances return potential with downside defense. For comparison with Keller's earlier breadth-based approach, see the Vigilant Asset Allocation G12 and Vigilant Asset Allocation G4 strategies.
Pros
- Canary system provides earlier crash signals without keeping the portfolio unnecessarily defensive during normal markets
- Intermediate defensive state (one canary negative) creates a graduated response rather than an all-or-nothing switch
- Lower average cash allocation than predecessor strategies, improving long-run return potential
- Backed by a published academic paper with extensive historical backtesting
Cons
- Like all trend-following strategies, can whipsaw in choppy markets and lag during rapid recoveries
- Requires monitoring two separate universes monthly -- the canary assets and the offensive asset universe
- The two-canary signal can occasionally give false positives during isolated EM or bond market stress
Technical Notes
Momentum is measured using a weighted average of annualized 1-, 3-, 6-, and 12-month returns. The offensive universe spans 12 global assets including equities, real estate, commodities, gold, and bonds. The defensive universe offers three options (short, intermediate, and long-term bonds) with the strategy selecting whichever shows the strongest momentum. Rebalancing occurs monthly.
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Average Allocation
Based on historical average weights across all rebalance periods.
Performance Snapshot
Rolling Returns
| Period | Low | Average | High |
|---|---|---|---|
| 1 Year | -11.9% | +14.0% | +57.6% |
| 3 Year | -3.5% | +13.6% | +30.7% |
| 5 Year | +3.1% | +13.8% | +27.3% |
| 10 Year | +4.1% | +13.9% | +24.9% |
Growth of $10,000
Historical Drawdown
Percentage decline from the portfolio's peak value at each point in time.
Rolling Returns
Annualised return for each rolling period ending on that date.
Annualised return for each 1Y period ending on that date.
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