Protective Asset Allocation — Conservative (PAA-CPR)
Developed by Keller & Keuning · Breadth Momentum · Low-Med Risk
The conservative variant of Protective Asset Allocation applies a more sensitive breadth threshold to the same graduated crash protection framework introduced by Keller and Keuning in their 2016 SSRN paper (#2759734). Where the standard PAA begins increasing its defensive allocation only when breadth deterioration reaches a moderate level, PAA-CPR starts shifting to bonds earlier — at a lower threshold of breadth weakness — and increases the bond allocation more aggressively at each subsequent level of deterioration. This heightened sensitivity produces a strategy that spends more time in partially or fully defensive positioning, reducing drawdowns at the cost of lower returns during trending bull markets.
The conservative parameterization reflects a specific design philosophy: for investors whose primary concern is capital preservation rather than return maximization, the cost of false defensive signals (missed upside during false alarms) is less damaging than the cost of insufficient protection (absorbed drawdowns during genuine bear markets). By calibrating the breadth threshold to trigger earlier, PAA-CPR trades some bull market participation for substantially reduced exposure to the early stages of market declines — the period when most of the psychological and financial damage occurs.
PAA-CPR monitors the same twelve diverse assets as the standard variant — spanning US equities, tech, small caps, European and Japanese stocks, emerging markets, real estate, commodities, gold, high-yield bonds, investment-grade bonds, and long-term Treasuries — and uses the same price-to-moving-average ratio for momentum ranking and the same twelve-month simple moving average for breadth assessment. The only difference is the sensitivity parameter that controls how quickly and aggressively the crash protection fraction increases as breadth deteriorates.
The practical difference between the standard and conservative variants is most visible during the transitional periods between bull and bear markets. When breadth begins deteriorating — perhaps four or five of twelve assets have broken below their moving averages — the standard PAA may maintain seventy percent risk-on allocation while the conservative variant has already shifted to fifty percent or less. If the deterioration continues into a genuine bear market, the conservative variant's earlier defensive positioning produces meaningfully smaller losses. If breadth recovers and the decline proves to be a false alarm, the conservative variant has sacrificed more upside than the standard version.
How It Works
Enhanced Breadth Sensitivity
Each month, all twelve universe assets are evaluated against their twelve-month simple moving averages. The strategy counts how many are trading above their respective trend lines, producing the same zero-to-twelve breadth score used by the standard PAA variant. The difference lies in how this score is converted into a crash protection fraction.
The conservative parameterization sets a higher sensitivity threshold, meaning the crash protection fraction begins increasing at lower levels of breadth deterioration. Where the standard PAA might allocate ten percent to bonds when three assets are below trend, the conservative variant might allocate twenty-five percent at the same breadth level. This accelerated defensive response means the portfolio reaches meaningful defensive positioning earlier in the deterioration process.
Earlier and Larger Defensive Allocations
The heightened sensitivity produces a strategy that spends significantly more time in partially defensive positioning. During normal market conditions with one or two assets temporarily below their moving averages — a common occurrence even during healthy bull markets — the conservative variant maintains a visible bond allocation that the standard variant would effectively ignore.
This persistent defensive tilt acts as a continuous insurance premium. In most months it represents a modest drag on returns relative to the standard variant. During the relatively rare months when breadth deterioration accelerates into a genuine bear market, the pre-existing defensive allocation provides meaningful head start protection. The cumulative impact of these two effects — frequent small costs and occasional large benefits — produces a strategy with lower compound returns but substantially smaller maximum drawdowns.
Momentum Selection Within the Reduced Risk Budget
The risk-on portion of the portfolio — whatever percentage remains after the crash protection fraction is applied — is allocated equally to the top six assets by price-to-moving-average ratio, using the same momentum ranking as the standard variant. The broader six-asset selection (versus PAA's three) provides additional diversification within the reduced risk budget, reflecting the conservative philosophy of spreading risk across more positions rather than concentrating in fewer.
The practical effect is a portfolio that rarely holds its maximum risk-on allocation. Even during healthy markets, the sensitive breadth threshold typically keeps some portion in intermediate bonds, producing a baseline asset allocation that is inherently more conservative than a fully invested momentum portfolio. This structural defensiveness is the defining characteristic of the variant and the source of both its protection benefits and its relative return drag.
Explore Protective Asset Allocation — Conservative (PAA-CPR)
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