QLAB’s asset allocation strategies had a positive month completing what has been a very satisfactory year in terms of risk-adjusted performance.
Hindsight is a wonderful thing of course, but in 2013 those who had been invested in developed market equities and avoided long dated government bonds must be feeling happy whilst those who were not may feel some regret. For both groups however, the more important question is what to do in 2014. QLAB’s models are not predictive over such time scales (nor do they feel emotions about past performance by the way), but rather they are reactive month-by-month and here is how they reacted during 2013
- US Equity exposure remained close to the maximum exposure limit except for a slight reduction during mid June, with exposure focussed on Healthcare, Industrials, Consumer Staples, Consumer Discretionary and Financials which happened to be the best 5 performing sectors
- Commodity exposure remained at zero throughout the year due to highly negative performance in general, the broad CCI index returned -8% for instance
- US government bond exposure switched from the 5YR treasury into the 2YR Treasury in June and low duration has been maintained since. In 2013 the 5YR Treasury returned -1.82% whilst the 2YR Treasury was positive and slightly ahead of cash
- FX exposure was dynamic but three currencies in particular featured for most of the year: CHF, NZD and EUR which all gained versus USD.
Have these systematic exposure decisions added value? In terms of performance contribution the answer is generally yes, but our more stringent test is to compare performance to a naive portfolio which comprises of approximately equal weights across the opportunity set, rebalanced monthly, which returned 1.93% in 2013 or about 5% behind Spectrum and QLAB Asset Allocation which have the same risk budget. To learn more about the investment process and performance versus the naive portfolio you can find a version of a published paper at http://bit.ly/IntelligentIndexEngineering
The dynamic leverage model applied in QLAB Dynamic Allocation, which takes up to x3 exposure to QLAB Asset Allocation was at x3 the whole year except in the middle of the year when it briefly fell to x2, with the effect of boosting returns to nearly 20%. It is important to note these returns come with no more volatility than equities, on average 12% to 15% and with considerably lower drawdown risk. Further, the correlation to equities is dynamic with higher correlation in years such as 2013 and lower correlation when equities perform poorly. We believe these equity-like return and volatility properties, lower drawdown risk and dynamic correlation should appeal to those investors now cautious about entering or maintaining high equity allocations.
Exchange traded products tracking QLAB Asset Allocation and QLAB Dynamic Allocation are available through our partner Neue Helvetische Bank in Switzerland with ISIN codes CH0219823157 and CH0219823165 respectively.
Equity risk generally remains low and stable and the major trends are intact hence the allocation remains the same for the coming month
- Equity allocation remains near maximum with sector exposure to Industrials, Cyclicals, Non-Cyclicals, Healthcare and Financials
- Commodity allocation remains at zero due to continuing poor trend
- FX exposure (long against USD) unchanged with positions in CHF, NZD, EUR and GBP
- Fixed Income exposure unchanged with relatively short duration stance in the 2YR Treasury bond
- The dynamic leverage exposure in the Dynamic Allocation strategy remains at 300% keeping volatility similar to that of global equities.
FURTHER INFORMATION AND INDEX OVERVIEW SHEETS
We would also like to announce that we are launching a series of single asset class indices based on the same technology behind the asset allocation strategies, each available in 2 formats:
- Relative Return: staying fully invested with the aim to rotate into the best performing assets in the opportunity set taking the same level of risk as the benchmark
- Risk Budget Managed (RBM): maintain the same upside as the relative return strategy but at significantly lower risk (volatility and drawdown) through use of a dynamic cash allocation
Available on several markets:
- Global Equities –> 10 global sectors and 4 regions
- European Equities –> 10 sectors
- US Equities –> 10 sectors
- Commodities –> 14 commodities