July 2012 0.80%
YTD 2012 2.04%
1 Year 2.01%
Since inception 3.94% (since 1-Jan-11, annualised)
Risk (volatility) 5.48% (since 1-Jan-11, daily data annualised)
Most assets globally received a boost in July due to strong comments from the ECB however this was quickly muted after further comments just after month-end showing the fragility of the situation and the need to remain cautious and diversified. Spectrum was well positioned for July and all positions showed a positive performance leading to a month-end performance of 0.80% bringing YTD to 2.04% and since inception annualised to 3.94%. Risk remains close to the target 6% annual volatility.
We were recently asked if we are “happy with performance”. A simple question perhaps but one that requires a careful response. It is notoriously difficult to draw conclusions from performance comparisons and there are some important questions which must be properly addressed, amongst them: 1. Against what should be the comparison? 2. What risks were involved in achieving the returns? 3. What would be the alternative portfolio in the absence of any belief in the strategy in question?
With question 1. we use indices where the investment objective can be considered comparable to Spectrum. Given Spectrum is long-only, non-leveraged, multi-asset with the possibility to allocate 100% to cash and a risk budget of 6% annual volatility it seems logical to select a range of absolute return Hedge Fund indices with similar risk, namely the HFRX and Barclay Hedge indices shown below. Note that whilst the HFRX indices are investible, the Barclay Hedge indices are not.
With 2. on risk, we look at annual volatility over various time periods to review risk stability and also maximum drawdown (worst peak to trough performance over the stated period) to look for evidence of a fat left tail.
With 3. on the alternative portfolio, we use the naïve portfolio which is the entire opportunity set of Spectrum held with maximum allowed exposure to equities (25%), commodities (25%) and currencies (20%) then equally weighted at the position level. This can be considered the portfolio held in the absence of active views or is perhaps “the market” Spectrum is trying to beat. We actually think this the more appropriate yardstick to show if value can be added through the Spectrum risk management and active selection processes.
The results of the comparison are shown below. Note that we have subtracted 1% per annum from the published Spectrum index returns to make a more fair comparison with the indices which are net of fees and costs. Note that actual products based on the Spectrum index may have lower pricing and this figure thus represents a maximum cost effect.
So back to the main question, are we happy with performance? The answers is yes, we are very satisfied that Spectrum is performing as expected and delivering on its investment objective as well as comparing favourably to a range of indices. Spectrum risk is stable, within target and with no evidence of fat left tail. But we don’t draw that conclusion from this performance comparison alone, we also look at how the strategy behaves under different market conditions, how it behaves over time and also how it would perform if certain of the systematic elements were turned off or stressed in some way. We are very happy to take you through this more detailed analysis at any time should you be interested.
The asset allocation for the coming month is as follows
- Equity allocation remains unchanged with allocations in Cyclicals, Non-Cyclicals, Healthcare, Technology, Telecoms and Utilities
- Commodity allocation remains at zero due to poor relative performance properties as an asset class
- FX exposure slightly increased to 7% with new positions in CAD and AUD in addition to the existing NZD position, the JPY position goes out
- Fixed Income exposure to 2YR and 5YR US Treasuries slightly reduced to 15% and 45% respectively with an unchanged 3% in cash.
See overview SPECTRUM-IDX-OVERVIEW_31Jul2012.pdf