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2 Feb 2016

QLAB Invest - Update Janaury 2016
   

Absolute-Return Strategy Performance as of 31 January 2016

MULTI-ASSET LONG ONLY
MTD
1Y
3Y
5Y
10Y
RISK (10Y)
MDD(10Y)
QLAB Asset Allocation
1.66%
0.08%
2.86%
3.28%
7.07%
5.52%
-7.20%
QLAB Dynamic Allocation
1.66%
-2.27%
5.84%
7.21%
12.64%
12.47%
-13.65%
Naïve Market Portfolio[1]
-1.94%
-7.29%
-2.48%
-0.50%
4.27%
8.76%
-26.37%

RETURNS: Annualised if >1Y   |   RISK: Annualised standard deviation or volatility, daily data   |   MDD: Maximum drawdown, peak to trough.
Strategy indices live 1-Jan-2011, see 
www.qlabi.com for more details or QLAB <GO> on Bloomberg.
Indices calculated net of trading costs, gross of product fees. Investable products may have lower returns and shorter track records.
[1] Naïve market portfolio is a performance reference, comprising 25% US equities, 25% Commodities, 20% FX, 30% US Fixed Income.

Download this Newsletter in PDF  here -> QLAB_UPDATE_JANUARY_2016.pdf

SUMMARY

It has been a turbulent start to the year with risk assets selling off significantly, and most equity markets now 10% or more below where they were around the middle of 2015. Economic and political news feeds contain mostly bad news mixed with glimmers of hope which has driven volatility up dramatically. The 20 day US Equity volatility is now 25% and European equities 30%, more than double their figures in November. Thus large daily swings and even monthly swings in either direction are to be expected.

The QLAB strategies were however, well positioned for the January market conditions, having de-risked in Autumn of last year. The strong performance comes from holding US Treasury bonds which have recently acted as a safe haven.

Which brings us to a question we received recently, asking "We monitor a range of multi-asset funds, most of which had a terrible start to the year, but the QLAB multi-asset strategies have outperformed all of them, why is that?". From the data they provided us, out of 49 funds tracked, only 5 are positive year to date, 19 lost more than 4% in January which does not compare favourably with the annual volatility expectation of these funds which is mostly in the range 5 – 8%.

Whilst we would not normally delve into the differences of competing strategies over such a short time scale, we felt the question deserved an answer. Also, given the current market sentiment it is worth looking at what's happened over the last few months that has led up to the defensive positioning in the QLAB strategies which has preserved capital for investors and how this may lead to further benefits if markets deteriorate as the year progresses.

There are a number of reasons we gave in our answer:
  1. The QLAB Strategies use relative price momentum to navigate assets combined with sophisticated risk management techniques
    • There is no reliance on economic or any other forecasting, which arguably has been challenged by events of the last few months. Neither is there over-reaction to short-term market movements, which tend to be noise, and the portfolio has been stable now for 5 months
    • The strategies focus on what can be managed, namely market risk, cost and liquidity rather than what cannot be managed, which is return.
  2. The QLAB investment process is fully rules-based or systematic and has not been changed for more than 5 years
    • It is always important to keep emotions and behavioural biases out of investment decisions of course, but especially so during periods of high volatility or uncertainty when even seasoned professionals can get nervous
    • It is also important not to tinker with a strategy that is working, and whilst there will likely be upgrades in the future, we will always be ruthless in ensuring the integrity of the strategy.
  3. The investment universe is multi-asset without neutral benchmark weights or even minimum weights
    • A multi-asset approach enables the strategy to find a place of relative safety in a crisis, but only if falling assets can be exited fully, whilst benchmark constrained strategies are driven more by the benchmark than by the active decisions
    • In the QLAB strategies equities were exited at the beginning of September last year and commodities a year earlier, these high conviction shifts combined with more subtle bottom-up rotation within asset classes are very effective at mitigating drawdowns, which ultimately drives the strong relative performance.

The result of the above approach is that the QLAB strategies generally outperform the market they invest in with considerably less drawdown risk. Whilst returns can’t always be high in absolute terms if the market doesn’t deliver, they are very likely to be better than a benchmark or buy-and-hold approach.


FIGURE 1: LIVE INDEX PERFORMANCE VERSUS THE MARKET, REBASED TO 100 ON 31-DEC-2010


COMMENT: Annual returns the last 5 years are a little below longer term expectations, however given the negative market conditions, the strategies have been effective in preserving and growing capital


FIGURE 2: LIVE INDEX DRAWDOWNS VERSUS THE MARKETS


COMMENT: The unconstrained investment approach allows for falling assets to be exited, which is very effective at preventing large drawdowns, preserving capital and allowing investors to stay invested with confidence



FIGURE 3: LIVE ROLLING 12 MONTH CORRELATION OF QLAB ASSET & DYNAMIC ALLOCATION TO US EQUITIES




COMMENT: Correlations are generally high when good returns are coming from equities, however in the last year correlation to equities has fallen to below 0.4 as the strategies went defensive, and this figure will fall further as long as the portfolios stay defensive



FIGURE 4: LIVE ASSET ALLOCATION



COMMENT: Asset allocation moves are decisive yet intuitive, and, over time, create the outperformance above a buy-and-hold or market benchmark approach

 
OUTLOOK
 
The portfolios remain in the same defensive position for now, 100% US Treasuries split between the 2yr and 5y. When stronger momentum appears in US equities, Commodities or FX the strategies will re-risk automatically. It is certainly not easy to predict when this will happen which is why an evidence based indicator such as momentum is so robust over the economic cycle.

To the downside, interest rates could indeed rise again in the US, and if sufficiently quickly, the strategy can go even more defensive, exiting first the 5yr and then the 2yr US Treasury, and going into cash to preserve capital.

 
NEWS – QLAB OFFERS CUSTOM STRATEGIES
 
QLAB can build a custom strategy for your institution. These strategies use exactly the same investment models as our live strategies but the models are applied to the investment universe defined by the institution with a corresponding set of investment constraints. These may be set to position the strategies alongside other offerings on the product shelf, or comply with regulations such as UCITS. The resulting strategies add convexity to client portfolios through lower drawdown risk than comparable benchmark investing with strong outperformance across an investment cycle, and are delivered via a simple and low-cost license agreement.

Visit www.qlabi.com or Email us at info@qlabi.com for more information
 






Close disclaimer

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.