|3 Jun 2015|
QLAB Invest - Update May 2015
Multi-Asset Absolute Return Strategy Performance as of 31-May-2015
RETURNS: Annualised if >1Y
RISK: Annualised standard deviation or volatility, daily data
MDD: Maximum drawdown, peak to trough
Strategy indices live since 1-Jan-2011, net of trading costs, gross of product fees. Investable products may have lower returns and shorter track records
May was a strong month for both strategies driven by US equity exposure and in particular the selective exposure to Healthcare, Consumer Discretionary and Technology sectors which all outperformed the S&P500. The US Treasury bonds also contributed positively despite some mid-month yield volatility. YTD performance remains strong with contribution about even between US equities and US Treasury bonds.
Realised risk remains similar to last month and still at the lower end of the expected ranges with QLAB Asset Allocation 1 year volatility at 3.6% and QLAB Dynamic Allocation at 10.8%.
Looking forward, the strategies remain fairly balanced across US equities and US Treasury bonds with asset exposure and leverage levels at maximum due to relatively low realised risk and strategy performance close to all-time-highs. Commodities and FX (long against USD) remain absent due to weak momentum characteristics.
Which prompts the question "what happens if there is a combination of an equity and bond market correction?". Whilst equities and bonds are often assumed to offer diversification in a portfolio it is actually not that uncommon to see them moving in tandem over shorter time periods. However, a full blown bond correction such as was seen during "the massacre" of 1994 plus a sustained equity market sell-off such as witnessed in 2008 or 2001 is thankfully quite rare but would indeed be the perfect storm to upset most multi-asset portfolios if it did happen.
Whilst we cannot know when or even if such an event will happen, the QLAB strategies are designed to weather such a storm due to the following features:
- The forward looking risk management accounts for non-normality in asset returns meaning left-tail shocks have less impact versus normal or Gaussian models
- The portfolio construction process does not assume the usual diversification benefits of combining equities and bonds, instead assuming stressed or high correlations, which provides more protection in months when equities and bonds do sell-off together versus a modern portfolio theory or Markowitz approach based on long-term correlation assumptions
- Equity positions will be exited completely if there is a sudden or sustained correction, which limits drawdowns, and we are constantly aware of how close the models are to exit points
- Bond positions will also be exited completely if there is weak performance versus cash, providing active duration right down to zero years. This was effective during the second half of 2013 when a 5YR US Treasury position was exited following the first episode of "taper terror". The bond position was subsequently bought back in mid 2014 and has provided good contribution since
- In the leveraged QLAB Dynamic Allocation strategy, the exposure is reduced if short-term volatility increases and/or prices decline providing a powerful process to quickly take risk off the table and further control drawdowns.
Given the QLAB models are reactive rather than predictive and manage risk rather than returns, the fully systematic investment processes not only provide robust risk management in a crisis but also high diversification to discretionary and fundamentally managed strategies.
To confirm this, we ran a detailed analysis as to how the QLAB strategies would have behaved in the major crises of the last 35 years. The results are certainly worth looking at, please contact us at email@example.com for the presentation.
QLAB CEO Steven Bates authors an interesting article in the latest edition of the Dutch newspaper Financial Investigator titled "What to do with your fixed income - you used to sleep well", see www.financialinvestigator.nl
QLAB Asset Allocation and QLAB Dynamic Allocation are accessible in two formats via our product partners:
- RPM Risk and Portfolio Management (www.rpm.se) manage two Luxembourg funds: QLAB Convexity Fund and QLAB Convexity DL Fund 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