As is clear the year has started with new optimism and investors are definitely „risk on“ even if we don’t like the term.
However despite the current breather let us not forget the dark clouds that still surround us. The European sovereign debt problems are not solved and GDP growth continues to slow. Leading risk indicators are currently relatively low which has fuelled the inflows into equity markets but other indicators such as the Baltic Dry Index show slowing global goods shipping which concurs with the views of many that recession lies ahead of us.
Now, as much as ever, is a time to reflect on risk management measures. They need to be robust against sudden shocks which can happen without warning. This means they need to take into account non-normality of returns, or fat tails, which are evident in most markets and they should have a conservative stance on correlations which can increase suddenly and weaken diversification.
The Spectrum strategy accounts for both fat tails and risk of increased correlation in order to keep the risk within its defined range.
January ended with a YTD performance of 0.85% after a full year performance in 2011 of 3.21% with long term volatility around 6%.
The asset allocation for the coming month has changed as follows
- Equities reduced from 32% to 24% as the energy sector position was reduced to zero due to weaker relative performance
- Commodity exposure remains at zero due to lack of clear positive trend relative to US treasuries
- Slight increase from 7% to 9% to currencies with positions still in JPY, AUD and NZD
- Increase to 2yr and 5yr US Treasuries to 16% and 49% respectively.
See overview SPECTRUM-IDX-OVERVIEW_31JAN2012.pdf