|6 Jan 2015|
QLAB Invest Year-end Review 2014
Multi-asset Absolute Return Strategy Performance as of 31-Dec-2014
RETURNS: Annualised if >1Y
RISK: Annualised standard deviation or volatility, daily data
MDD: Maximum drawdown, peak to trough
Strategy indices published live since 1-Jan-2011, products tracking the strategies may have shorter track records
Up to Q3, asset prices gained steadily across the board with QLAB Asset Allocation and Dynamic Allocation hitting all-time-highs in August. Then the last few months of the year witnessed increased volatility in many asset classes with a strong sell-off in most commodities and some stock sectors coupled with rapid USD strengthening. Sharp reversals create a challenging environment for the QLAB models where positioning is driven to a large extent by medium-term relative momentum. Despite the drawdowns witnessed in the last quarter the risk management processes were successful in limiting the losses due to decisive allocation changes.
We are satisfied with the year’s performance given the challenging environment in the last quarter. Over 2yrs and upwards, the returns are in line with expectations, and volatility remains stable and within limits. We are especially happy with the way the high conviction asset allocation moves prevented further drawdowns in the last quarter, one of the key value propositions of the QLAB approach. The following chart shows the drawdown of QLAB Asset Allocation versus the Naïve Market Portfolio comprising the same investment universe held at maximum exposure, rebalanced monthly. Note that correlation is high when markets are steady, but from September the active management resulted in a lower drawdown than the naïve or benchmark approach by allocating away from falling assets.
- Sector dispersion remained high, reiterating the benefits of sector rotation: Healthcare was the best sector with a total return of 26.1% whilst the worst sector was Energy with -5.6%
- Performance contribution was strongest in Healthcare which had an allocation the entire year
- The Energy sector position that was put on in May was sold in September following the sharp reversal, actually contributing just 0.09% of negative performance for the year in QLAB Asset Allocation, an example where sector rotation can also pay off in managing downside risk
- The equity performance contribution was positive for the year and the dominating factor in both strategies
- At the end of April, as measured by the broad CCI index, commodities were actually up 11% for the year then turned over sharply to finish the year down 21%
- Whilst Crude Oil received the most publicity, losing over 37% for the year, it’s worth noting the high dispersion with Coffee gaining 50% whilst Copper lost 15%, highlighting the potential of selective commodity exposure
- Whilst the strategies are long-only, they were not as badly caught out by the reversal as one might expect, and performance contribution was still positive from Coffee, Crude Oil and Zinc for the year. However, overall contribution to performance for the year from Commodities was slightly negative reducing the performance but only by 0.18% in QLAB Asset Allocation
- Importantly, all commodity positions were fully exited in September, preventing further drawdown which would have been much worse had the positions stayed on.
- The strategies do not predict price movements but react to relative price momentum which meant the 2YR Treasury was held the whole year and the 5YR since June, providing good positive performance contribution, overall delivering about a third of the full year performance
- The strategies are constrained to allocate long-only to FX against the USD which worked out well to June, especially in NZD and GBP, however the USD strengthening was rapid, gaining over 13% in the second half the year which pushed all FX positions into loss
- The models reacted and closed all FX positions in September but the resulting contribution was negative for the year, about -0.7% on an absolute basis in the QLAB Asset Allocation strategy.
The first few trading days of the year have been bumpy with the S&P500 losing almost 2% and Oil losing 7% however the QLAB strategies are well positioned with no Commodities and no Energy equities. The Healthcare equities so far have not fallen as much as the S&P500 and the US Treasury positions are positive and have cushioned the reduction in equity prices. There has been a rotation out of Technology equities into Consumer Discretionary which have performed much better recently. FX exposure remains at zero whilst the USD continues to strengthen. The portfolios thus remained fairly balanced from a risk perspective and the models will react defensively should there be a major equity sell-off.
QLAB Asset Allocation and QLAB Dynamic Allocation are accessible in two formats via our product partners:
Please contact us at email@example.com if you would like to receive product information directly from our partners.
- RPM Risk and Portfolio Management (www.rpm.se) manage two AIFMD funds (QLAB Convexity and QLAB Convexity DL) available to professional investors
- Neue Helvetische Bank (www.nhbpro.ch) manage two listed certificates traded on the SIX stock exchange available to Swiss domiciled retail and professional investors
All that remains is for us to wish you a happy, healthy and successful 2015!