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2 Jul 2012

Performance figures

June 2012              - 0.50%
YTD 2012                 1.23%
1 Year                       2.13%
2011                         4.18%
Since inception      3.62% (since 1-Jan-11, annualised)
Risk (volatility)        5.58% (since 1-Jan-11, daily data annualised)

The roller coaster ride continues with asset price swings currently the result of the decisions of only a handful of individuals, mostly politicians. The most recent big news was positive causing a surge in risky assets reversing May’s drawdown.

The Spectrum strategy reacts not to single month returns but to the statistical properties of competing returns over a dynamic period of up to 12 months. It is worth remembering the performance of US equities in May (-6%) and June (+4%) are not extremes given the monthly standard deviation of about 4.5%. The Spectrum strategy found the period ending May gave a signal to exit equities, the period ending June gave a signal to enter into equities once more. By contrast, the commodity performances in May (-8.8%) and June (+6.1%) following a period of general weakness did not generate a signal to re-enter commodities.

The recent new exposure to NZD (performance +6.7% in June) provided positive performance contribution whilst exposure to JPY and US treasuries had negative contribution.

To understand how Spectrum adds value it is useful to look over longer time horizons versus some naïve investment strategy, such as holding a passive broad portfolio with similar risk. We define such a portfolio to be the opportunity set of Spectrum held with maximum allowed exposures to risky assets with the remainder equally spread between cash and the two government bonds, which results in the following asset allocation for the naïve portfolio:

US Equities 25%
Commodities (CCI) 25%
FX versus USD 20%
Cash 10%
2yr Treasury 10%
5yr Treasury 10%

The table below compares risk and return of the naïve portfolio and Spectrum using daily data:

                                                                                                                                    Naïve          Spectrum
Compound annual return, since 1-Jan-11                                                         0.94%             3.62%
Long term annualised volatility, since 1-Jan-00                                                7.64%             5.58%
Short term annualised volatility, since 1-Jan-11                                                8.70%             5.58%
Maximum drawdown, since 1-Jan-11                                                                 -9.50%           -5.08%

Some observations:
  • The risk of the naïve portfolio has increased recently, yet Spectrum risk remains stable and within the 6% budget due to strict risk management
  • Spectrum has been successful in navigation the assets in the opportunity set to largely avoid the drawdown seen in the naïve portfolio
  • The outperformance with lower risk is significant and a result of the risk management and active asset allocation combined.
The chart below shows how erratic the naïve portfolio has been since 1-Jan-11 (Spectrum live date) and Spectrum has managed to neutralize the downside risk of this passive portfolio whilst still capturing good upside:

The asset allocation for the coming month is as follows
  • Equity allocation goes from zero to 30% 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 reduced with 3% and 2% now in JPY and NZD respectively
  • Fixed Income exposure to 2YR and 5YR US Treasuries reduced to 15% and 47% respectively with 3% in cash.
See overview SPECTRUM-IDX-OVERVIEW_29Jun2012.pdf

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DISCLAIMER: This document does not constitute an offer, a solicitation, an advice or a recommendation to purchase or sell any investment products associated with the material described herein. The purpose of this document is to describe the principles, research and ideas behind the QLAB Invest strategy indices. Prior to an investment in any product tracking a strategy index, you should make your own appraisal of the investment risks as well as from a legal, tax and accounting perspective, without relying exclusively on the information provided by QLAB Invest. Investment products tracking the indices must be issued or/and marketed by a regulated company. This document is strictly for informative purpose. The single source of the underlying asset data is Thomson Reuters Datastream and QLAB Invest cannot guarantee the correctness of the underlying asset data and cannot be held legally responsible in this regard. Any references made to historical performance up to the official live inception do not reflect actual live performance and can be subject to selection, curve fitting and other statistical biases. Performance in investment products linked to the indices may be reduced by the effect of commissions, fees or other charges in excess of those already factored into the index calculations. The level of the indices will fluctuate due to the volatility of the underlying exposures and past performance or volatility is not necessarily indicative of future results.